Fitch Ratings has downgraded the Issuer Default Ratings (IDRs) of four Chinese national asset management companies (AMCs) by one notch, reflecting reduced government support expectations.
The IDRs of
The Outlook on
The Shareholder Support Ratings (SSRs) for
Key Rating Drivers
Non-Bank Financial Institutions Criteria Applied: Fitch reassessed government support expectations for the AMC sector in these rating actions by applying the Non-Bank Financial Institutions Rating Criteria. The AMCs' support-driven ratings were previously assessed under our Government-Related Entities Rating Criteria and their standalone credit profiles under the Non-Bank Financial Institutions Rating Criteria, with the latter approach reflecting their business models and for-profit orientation. The change in criteria reflects increasing linkages between the AMCs' standalone credit profiles and policy roles.
Weakened Support Dynamics: The national AMCs' ratings are driven by our expectation of government support from the
Further Potential Weakening in Government Support: The RWN on China Orient,
The Stable Outlook on
GSRs Reflect Meaningful Policy Roles: We have assigned Government Support Ratings (GSRs) of 'a-' to
The GSRs reflect our expectation of extraordinary support from the government to the AMCs in times of need. This is based on the AMCs' significant policy functions, counterbalanced by our belief that the AMCs have a lower support priority relative to other policy institutions and systemically important banks, the latter of which have larger, deposit-funded balance sheets. Our government support expectations also vary between the AMCs based on each issuer's ability to perform its policy function.
Inconsistent Government Support: We believe the government's support stance towards the AMCs has been inconsistent. For example, the significant delays in
Varied Policy Execution Ability: The four AMCs have varied abilities to execute and fulfill their policy roles, due to different degrees of capital strength. Low capitalisation acts as a constraint on some of the AMCs' policy role execution, as limited headroom against regulatory requirements impedes their ability to undertake policy-driven business, in our view. Unlike many other policy institutions, the AMCs also seek to balance their policy roles with their for-profit orientation, which can constrain their capacity to support projects with limited commercial benefits.
Intrinsic Strength Under Pressure:
Look-Through Approach to Assess Support: We believe the Chinese government would be the ultimate support provider to the AMCs in the event of need. This reflects the AMCs' policy significance and substantial market positions, despite the dilution of the government's direct shareholding in
RATING SENSITIVITIES
Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade
Weakening of the government's ability to support the AMCs, as indicated by a downgrade in the sovereign rating or a meaningful increase in system leverage.
Weakening of the government's propensity to support the AMCs, either as perceived by Fitch or as evidenced by a material delay or shortfall in capital or liquidity provision to an AMC when needed.
Reduced AMC capitalisation headroom relative to regulatory requirements without credible and achievable plans to replenish the capital, leading to a weakening of the AMC's ability to execute its policy function and, thus, reducing the government's propensity to provide support.
Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade
Stabilised or meaningfully improved standalone credit profiles, with strengthened capitalisation enhancing the AMCs' ability to carry out their policy functions and increasing their policy significance.
A positive change in the sovereign's rating.
A stronger government support stance, as evidenced by clearer government statements on support for national AMCs or a more timely and sufficient support record.
DEBT AND OTHER INSTRUMENT RATINGS: KEY RATING DRIVERS
We downgraded the ratings on the debt issued by AMCs' offshore funding vehicle, mirroring the rating actions on their AMC parents. The senior unsecured debt ratings are equalised with the ratings of the AMCs and their overseas subsidiaries, given the debt is guaranteed by these overseas subsidiaries and ranks pari passu with the overseas subsidiaries' other senior obligations.
The rating on senior perpetual bond issued by
The subordinated perpetual bond issued by Huarong Finance 2019 Co., Ltd. and guaranteed by
DEBT AND OTHER INSTRUMENT RATINGS: RATING SENSITIVITIES
The ratings assigned to the debt are sensitive to changes in the ratings of the AMC parents.
SUBSIDIARY AND AFFILIATE RATINGS: KEY RATING DRIVERS
We have downgraded the IDRs on the AMCs' overseas subsidiaries, mirroring the rating actions on their respective parent companies. We consider the overseas subsidiaries as core in light of their roles as their parents' sole offshore funding and investment platforms. As a result, we equalise their ratings with their parent companies' ratings.
We have assigned Shareholder Support Ratings (SSRs) of 'a-' to
SUBSIDIARY AND AFFILIATE RATINGS: RATING SENSITIVITIES
The ratings assigned to AMCs' overseas subsidiaries are sensitive to changes in the ratings of the respective AMC parents. Any signs of weakening linkage between the overseas subsidiaries and their respective AMC parents, which may weaken the support assessment, will also lead to negative rating actions.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
Public Ratings with Credit Linkage to other ratings
The national AMCs' ratings are directly linked to
ESG Considerations
China Orient has an ESG Relevance Score of '4' for Management Strategy, due to continued strategic shift to refocus on its core distressed asset management business. Its ability to execute its strategy under capital constraints undermines the company's focus on its policy role. This has a negative impact on the credit profile and is relevant to the ratings in conjunction with other factors.
China Great Wall has an ESG Relevance Score of '4' for Management Strategy, due to its continued strategic shift to refocus on its core distressed asset management business. Its ability to execute its strategy under capital constraints undermines the company's focus on its policy role. This has a negative impact on the credit profile and is relevant to the ratings in conjunction with other factors.
We have changed
China Great Wall and China Orient have ESG Relevance Scores of '4' for Governance Structure, given both companies have high ownership concentration, with the Ministry of Finance owning over 70% of the shareholding. We also consider the companies' governance structures as weaker, as they are non-publicly listed companies. This has a negative impact on the companies' credit profiles and is relevant to the ratings in conjunction with other factors.
China Great Wall has an ESG Relevance Score of '5' for Financial Transparency, given its limited transparency of asset quality and prolonged delay in the publication of its 2022 financial report. This has a negative impact on its credit profile and is highly relevant to the ratings in conjunction with other factors.
The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/topics/esg/products#esg-relevance-scores.
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