Hong Kong, July 23, 2019 -- Moody's Investors Service ("Moody's") has assigned
a Baa2 rating to the proposed senior unsecured USD bond due 2022 and an
A3 rating to the proposed unsecured and unsubordinated USD perpetual bond
to be issued by Coastal Emerald Limited (Coastal Emerald). The
outlook assigned to Coastal Emerald is stable.
Coastal Emerald Limited is an indirectly wholly owned subsidiary of China
Shandong Hi-Speed Financial Group Limited. (SHFG,
unrated) which is 42.78% owned by Shandong Hi-Speed
Group Co., Ltd (SDHG, A3 Stable).
The senior unsecured bond due 2022 is unconditionally and irrevocably
guaranteed by SHFG. SDHG provides a keepwell deed and an equity
interest purchase undertaking deed on the bond.
The unsecured and unsubordinated perpetual bond is unconditionally and
irrevocably guaranteed by SDHG.
SHFG plans to use the net proceeds raised through Coastal Emerald for
the refinancing of the company's existing indebtedness and other
general corporate purposes.
RATINGS RATIONALE
The Baa2 senior unsecured bond rating -- guaranteed by SHFG and supported
by a keepwell deed and an equity interest purchase undertaking deed from
SDHG -- incorporates: 1) SHFG's b3 standalone assessment
and; 2) five notches of affiliate-backed level of support
from the SHFG's parent SDHG whose baseline credit assessment is
ba1; as well as 3) two notches of uplift from a high level of support
from the Chinese government, via SDHG, in times of stress.
SHFG's b3 standalone assessment takes into account the company's
low and volatile profitability, limited track record under a new
management, high asset risks, a duration mismatch between
assets and liabilities as well as SHFG's historically low ability
to internally generate cash flows and capital before SDHG was brought
in as a strategic investor in 2016.
SHFG has a track record of volatile profitability in the recent years
partially attributable to the changing business model and revenue composition.
In the fiscal year ending March 31, 2018, SHFG reported net
profit of HK$671 million. However in the nine months ending
December 31, 2018, the company reported net loss of HK$691
million largely driven by significant impairment losses including a HK$146.6
million goodwill impairment and a HK$144.9 million impairment
on finance lease receivables. The finance lease receivables impairment
included HK$109.2 million of lifetime expected credit loss
under HKFRS 9.
On the cost front, the company benefits from direct and indirect
parental support on funding and therefore pays relatively low interest
rates. On the other hand, the company is in the process of
exploring a more profitable business model. New management was
put in place in the first half of 2019, and the company is also
strengthening key functions such as the investment and risk management
departments.
On the balance sheet front, SHFG has a risky investment portfolio
which concentrates in a small number of small-cap or illiquid securities.
Its lease and loans receivables are also highly concentrated and have
experienced high problem loan ratios in the recent years. In addition,
the company has a duration mismatch between its assets and liabilities
with 45% of liabilities being short-term while 53%
of assets being long-term and relatively illiquid. However,
the proposed unsecured debt due 2022 has a three year duration,
which will more or less mitigate the mismatch. In addition,
as of year-end 2018, over 90% of SHFG's funding
was directly or indirectly supported by the parent SDHG.
The affiliate-backed support incorporated into the rating of the
senior unsecured bond due 2022 takes into account the keepwell deed which
mandates SDHG's ownership at above 40% and includes a cross-default
provision. The support also considers SDHG's ownership in
and control over SHFG as well as the strategic, operational and
financial links between the two entities. SHFG is one of the three
listed subsidiaries under SDHG and recently became a first-tier
subsidiary of the group. The parent considers SHFG as its sole
offshore financing and investing platform and an important channel for
its global strategies. SHFG also carries SDHG's name and
logo. Therefore, it is in SDHG's interest to provide
extraordinary support to SHFG in times of stress in preserving SDHG's
reputation.
The high level of government support, via SDHG, incorporates
the parent's state-owned background and public policy role,
and the strategic importance of SHFG to SDHG as discussed above.
The A3 perpetual bond rating reflects the unconditional and irrevocable
guarantee from SDHG, which represents an unsecured, unsubordinated
obligation of SDHG. Therefore, the perpetual bond rating
is the same as the A3 issuer rating of SDHG.
What Could Change the Ratings -- Up
The Baa2 senior unsecured bond rating could be upgraded if SHFG's
standalone assessment improves and/or the parent's issuer rating
is upgraded.
SHFG's b3 standalone assessment could be improved if: 1) the
new management successfully implements new strategies evident by increased
profitability and an improved and more stable credit profile; 2)
asset risks in the company's investment and lending portfolios materially
decrease.
Given that the perpetual bond is guaranteed by SDHG, this bond rating
is in line with the parent SDHG's issuer rating. Therefore,
if SDHG's rating is upgraded, the perpetual bond rating would
also be upgraded.
What Could Change the Ratings -- Down
The Baa2 senior unsecured bond rating could be downgraded if SHFG's
standalone assessment deteriorates and/or the parent's issuer rating
is downgraded.
SHFG's b3 standalone assessment could deteriorate if: 1) its
capital adequacy deteriorates; 2) the duration mismatch between assets
and liabilities worsens; or 3) SHFG's strategic and economic
importance to the parent declines.
Given that the perpetual bond is guaranteed by SDHG, this bond rating
is in line with the parent SDHG's issuer rating. Therefore,
if SDHG's rating is downgraded, the perpetual bond rating
would also be downgraded.
The principal methodology used in these ratings was Finance Companies
published in December 2018. Please see the Rating Methodologies
page on www.moodys.com for a copy of this methodology.
Incorporated in British Virgin Islands, Coastal Emerald Limited
is indirectly wholly owned by Shandong Hi-Speed Financial Group
(SHFG). Shandong Hi-Speed Financial Group is incorporated
in Bermuda and 42.78% owned by the parent Shandong Hi-Speed
Group Co., Ltd (SDHG) which is ultimately 100% owned
by the Shandong provincial government. SHFG is consolidated on
the parent's financial statements effective June 2019 and also the
parent's primary offshore financing and investing platform.
As of December 31, 2018, SHFG reported total assets of HK$13.4
billion.
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.
Moody's considers a rated entity or its agent(s) to be participating
when it maintains an overall relationship with Moody's. Unless
noted in the Regulatory Disclosures as a Non-Participating Entity,
the rated entity is participating and the rated entity or its agent(s)
generally provides Moody's with information for the purposes of
its ratings process. Please refer to www.moodys.com
for the Regulatory Disclosures for each credit rating action under the
ratings tab on the issuer/entity page and for details of Moody's
Policy for Designating Non-Participating Rated Entities.
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.
Lan Wang, CFA
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
Yat Man Sally Yim, CFA
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
