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Rating Action:

Moody's affirms Fenghui Leasing's B2 CFR, downgrades the guaranteed senior unsecured note rating to B3

 The document has been translated in other languages

23 Jun 2017

Hong Kong, June 23, 2017 -- Moody's Investors Service has affirmed Fenghui Leasing Co., Ltd's B2 corporate family rating (CFR).

At the same time, Moody's has downgraded Silver Sparkle Limited's long-term backed senior unsecured debt rating to B3 from B2. Silver Sparkle is a wholly owned subsidiary of Fenghui Leasing.

The ratings outlook is stable.

RATINGS RATIONALE

AFFIRMATION OF FENGHUI LEASING'S B2 CFR

The affirmation of Fenghui Leasing's B2 CFR reflects Moody's concerns on the company's: 1) faster than system average asset growth, which pressures its risk management and capital adequacy; 2) high reliance on short-term funding, which results in a liquidity mismatch; and 3) increasing secured borrowing, which weakens its financial flexibility.

Nevertheless, these risks are offset by the company's: 1) improving asset quality metrics; 2) strong profitability; and 3) increasing funding channels.

The company has reported continuously rapid asset growth over the past few years. Total assets increased 116% year-on-year to RMB25.5 billion in 2016, including a 56% growth for its entrusted loan business and 135% growth in its leasing business.

Fenghui Leasing's capital adequacy has weakened, due to its rapid asset growth. At end-2016, the company's tangible common equity to tangible managed asset ratio (TCE/TMA) fell to 15% from 22% at end-2015. Moody's believes that Fenghui Leasing's rapid asset growth will continue to pressure its capital adequacy. In December 2016, Jinzhou Cihang Group Co., Ltd (JC Group, unrated), Fenghui Leasing's largest shareholder, announced that Fenghui Leasing's existing shareholders planned to inject additional RMB2 billion capital in total to Fenghui Leasing.

The company also leveraged secured borrowing to support its asset growth in 2016. Total secured debt increased to 45% of total assets at end-2016 from 22% at end-2015, indicating that its financial flexibility has worsened. And, because the company's funding is of shorter tenor than its assets, it has significant mismatches in the tenor of its assets and liabilities.

Fenghui Leasing reported an improvement in its assets quality metrics in 2016, mainly due to the disposal of its non-performing loans (NPLs) and rapid asset growth. Its NPL ratio fell to 0.7% at end-2016 from 2.8% at end-2015. Nevertheless, Moody's believes that such a rapid asset growth could create the risk of a deterioration in asset quality as the portfolio seasons.

The company has maintained its good profitability. Its return on average assets was at around 5%-6% over the past few years while it was in declining trend.

It has also slightly reduced its reliance on trust products and asset management plans in 2016, by diversifying its funding sources to bank loans, bonds, asset-backed securities and private bonds.

What Could Change the Rating — Up

Fenghui Leasing's ratings could be upgraded if the company: 1) maintains its asset quality as its portfolio seasons; 2) materially moderates its growth rate; and 3) reduces its reliance on short-term shadow banking and confidence-sensitive wholesale funding.

What Could Change the Rating — Down

The company's ratings could be downgraded if its: 1) problem loan ratio increases rapidly or exceeds 4%; 2) TCE/TMA continues to decline rapidly or lowers to around 10%; or 3) access to funding is negatively affected by regulatory scrutiny on shadow banking products.

DOWNGRADE OF SILVER SPARKLE'S LONG-TERM BACKED SENIOR UNSECURED DEBT RATING TO B3

The downgrade of Silver Sparkle's backed senior unsecured debt rating to B3 from B2 reflects the increased amount of Fenghui Leasing's secured obligations which negatively affects the loss given default of Silver Sparkle's backed senior unsecured notes. Silver Sparkle's USD150 million backed senior unsecured long-term notes are unconditionally and irrevocably guaranteed by Fenghui Leasing.

The guarantee represents an unsubordinated and unsecured obligation of Fenghui Leasing. As such, obligations under the guarantee ranks pari passu with Fenghui Leasing's existing and future unsecured and unsubordinated obligations.

However, the Silver Sparkle backed senior unsecured notes guaranteed by Fenghui Leasing are still structurally subordinated to Fenghui Leasing's secured indebtedness. Consequently, the increased amount of Fenghui Leasing's secured obligations weakens the loss given default of the Silver Sparkle's unsecured notes.

Moody's has analyzed the guarantee provided by Fenghui Leasing for the notes and concluded that the terms and conditions of the guarantee satisfy Moody's core principles of guarantees.

What Could Change the Rating — Up/Down

The notes to be issued by Silver Sparkle will be unconditionally and irrevocably guaranteed by Fenghui Leasing. The factors that can cause Fenghui Leasing's ratings to be upgraded and downgraded will also drive the rating on Silver Sparkle's notes.

The notes' rating could be in line with Fenghui Leasing's CFR if Fenghui Leasing's secured borrowing, under Moody's calculation, reduces to below 30% of total borrowing.

The notes' rating could be downgraded, if Fenghui Leasing's funding structure further weakens the loss given default and asset coverage ratio of Silver Sparkle's backed senior unsecured notes.

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Finance Companies published in December 2016. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Fenghui Leasing Co., Ltd is headquartered in Beijing. It reported assets of RMB25.5 billion at end-2016.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

The first name below is the lead rating analyst for this Credit Rating and the last name below is the person primarily responsible for approving this Credit Rating.

Sean Hung
Asst Vice President - Analyst
Financial Institutions Group
Moody's Investors Service Hong Kong Ltd.
24/F One Pacific Place
88 Queensway
Hong Kong
China (Hong Kong S.A.R.)
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

Minyan Liu
Associate Managing Director
Financial Institutions Group
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

Releasing Office:
Moody's Investors Service Hong Kong Ltd.
24/F One Pacific Place
88 Queensway
Hong Kong
China (Hong Kong S.A.R.)
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

No Related Data.
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