Fitch Affirms Guangzhou Asset Management's IDR at 'BBB'; Outlook Stable
(The following statement was released by the rating agency)
Fitch Ratings-Hong Kong/Beijing-05 February 2021:Fitch Ratings has affirmed China-based Guangzhou Asset Management Co., Ltd.'s (GZAMC) Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDR) of 'BBB'. The Outlook is Stable.
GZAMC, established in April 2017, is the second asset-management company (AMC) in Guangdong province licensed by the China Banking and Insurance Regulatory Commission for the bulk purchase and disposal of financial non-performing assets. The majority of GZAMC's total revenue comes from its main business of distressed asset disposal and restructuring. It also has other businesses including consulting services and investments.
GZAMC is 64.9%-owned by Guangzhou Yuexiu Financial Holding Group Co., Ltd (GYFH), a subsidiary of Guangzhou Yuexiu Holdings Limited (GYH), which held 43.82% of GYFH as of end-2020. GYH is fully owned by the Guangzhou government and is one of the largest state-owned enterprises by total assets in the municipality. GYH has four core businesses - financial services, real estate, transportation infrastructure and urban agriculture. GZAMC is the major subsidiary of GYH's financial-service segment.
Key Rating Drivers
Parent-Subsidiary Linkage: Half of GZAMC's board members, excluding one independent member, are appointed by GYFH. GZAMC's financials are also consolidated into those of GYH. GZAMC is required to report its business performance to GYFH and GYH periodically.
Weaker Credit Quality: We deem GZAMC's credit quality to be weaker than that of GYH. GZAMC contributed around 6.2% of GYH's consolidated net profit in 2019, and accounted for around 4.7% of the parent's consolidated total assets.
Moderate Legal Linkage: GZAMC's legal ties with GYH are moderate, as the provision of a liquidity support mechanism and the absence of inter-group funding restrictions are offset by the lack of guarantees and debt-instrument triggers between the two.
Strong Operational and Strategic Linkages: GZAMC's daily operational treasury management and banking facilities are separate from those of GYH. Nevertheless, their operational ties are assessed as strong, as the subsidiary is the only operating platform for distressed asset management within the group. Distressed asset management is the core business of GYH's financial-service segment and increasingly contributes to its revenue and profit.
The strategic ties between the two are also assessed as strong. GZAMC has been a key factor in supporting GYH's strategic importance to the municipal government due to its function of dissolving financial risk in Guangdong province. In addition, GZAMC has a large market share in distressed asset disposals in the province because of its better understanding of the local market. It also plays an important role in developing GYH's financial-service business. GYH and GYFH have provided tangible support, including capital injections, shareholder loans and a liquidity support mechanism.
Notching Below Parent: Fitch believes the overall linkage between GZAMC and GYH is strong in light of the parent-subsidiary relationship, the subsidiary's weaker credit quality and their strong operational and strategic linkages. However, GZAMC's rating is not equalised with our internal assessment of GYH due to the moderate legal connection and GYH's indirect control.
Debt and Liquidity: GZAMC's total assets are mainly non-performing assets purchased from financial institutions and loans extended directly to non-financial companies with short-term liquidity issues. GZAMC's total assets increased by 52% in 2019. The rapid asset growth is mainly supported by debt funding. GZAMC's total debt rose by around 50% to CNY19.7 billion by end-2019, with short-term debt accounting for around 47% of the total.
GZAMC's strong access to the financial market helps to mitigate the financing risk. The company said it had unutilised credit lines of CNY20.3 billion as of end-September 2020. GYH and GYFH can also provide liquidity support to GZAMC when necessary.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
- Upgrade in our internal assessment of GYH would lead to positive changes in the ratings of GZAMC as the subsidiary's ratings are derived from that of GYH.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
- Downgrade in our internal assessment of GYH would lead to negative changes in GZAMC's ratings.
- Significant weakening of GZAMC's legal, strategic and operational ties with its ultimate parent, or dilution in the parent's shareholding, could lead to a wider rating gap between GZAMC and our internal assessment of GYH.
Best/Worst Case Rating Scenario
International scale credit ratings of Sovereigns, Public Finance and Infrastructure issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of three notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit [https://www.fitchratings.com/site/re/10111579].
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.
ESG Considerations
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This 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. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg
Guangzhou Asset Management Co., Ltd.; Long Term Issuer Default Rating; Affirmed; BBB; Rating Outlook Stable
----; Local Currency Long Term Issuer Default Rating; Affirmed; BBB; Rating Outlook Stable
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