Capital raising good for China’s distressed managers, says S&P

28 August 2014   Category: News, Asia, China, Global   By Derek Au

Standard & Poor’s (S&P) says raising new capital would be positive for the credit ratings of Chinese state-owned distressed asset managers (DAMs).

Of the three state-owned DAMs S&P rates, the long-term credit ratings of China Cinda Asset Management (Cinda) and China Huarong Asset Management (Huarong) are both ‘A-’; one notch higher than that of China Orient Asset Management (Orient), which stands at ‘BBB+’. Addressing the higher ratings of the former firms, S&P said Cinda had the lowest financial leverage after its IPO last year, followed by Huarong, which has also introduced new strategic investors under its joint-stock company status.

"We believe that all the state-owned DAMs will be listed at some point, thereby minimising their gap in financial leverage," said S&P credit analyst Harry Hu. "The timing and the amount that can be raised are still uncertain for companies that are yet to list. Therefore, our ratings do not factor in the benefit. While new capital raisings are positive for the ratings, they are not automatic triggers for an upgrade."

Besides the raising of new capital, the ratings agency said in its recent report that it also assessed the likely loan growth and coverage of expected losses at DAMs. It added Orient has a larger concentration in the real estate sector and a higher portion of property under construction, which it said would pose a greater risk.

S&P also commented on the countercyclical nature of DAMs. It reasoned that economic slowdown and a rise in banks’ nonperforming loans present DAMs with opportunities to increase business volumes, which could give a boost to earnings over time, provided they maintain their funding costs and credit risk stayed within expectations. However, if economic conditions turned out to be worse than expected, DAMs could find asset risk inadequately priced at the time of purchase, which could lead to an increase in credit risk.

The ratings agency also took into account the risk profiles of DAMs’ subsidiaries in assessing their creditworthiness. It said the ratings of Chinese DAMs will come under pressure if their subsidiaries’ risk profiles weakened. “We assess the Hong Kong subsidiaries to be highly strategically important to their respective groups and believe potential government support to the parents will indirectly flow to these subsidiaries and their guaranteed bonds,” the report said.