Hong Kong, November 13, 2020 -- Moody's Investors Service has confirmed CAR Inc.'s Caa1 corporate
family and senior unsecured ratings.
At the same time, Moody's has changed the outlook on all ratings
to negative from ratings under review.
This rating action concludes the review for upgrade initiated on 22 July
2020.
On 10 November 2020, CAR announced that the sale and purchase agreements
signed in July 2020 between Jiangxi Province Jinggangshan Beiqi Investment
Management Co., Ltd. (Jinggangshan BAIC) and CAR's
shareholders, UCAR Inc. and Amber Gem Holdings Limited (a
subsidiary of Warburg Pincus & Co.), have been terminated
and may not proceed, respectively.
"The rating confirmation reflects the fact that CAR's high
refinancing risk, which is exacerbated by its substantial shareholder
UCAR's negative impact on its funding access, remains because
the transactions did not proceed," says Gerwin Ho, a
Moody's Vice President and Senior Credit Officer.
This development differs from Moody's original expectation that
the introduction of Jingganshan BAIC, an affiliate of Beijing Automotive
Group Co., Ltd. (BAIC Group, Baa3 stable),
as a key 28.9% shareholder could significantly improve CAR's
access to funding and weak liquidity, which are crucial to its business
operations.
The negative outlook on the ratings reflects the fact that the weak operating
environment and challenges at UCAR could weaken CAR's funding access and
financial profile.
RATINGS RATIONALE
CAR's Caa1 rating factors in its high refinancing risk and the risks
posed by UCAR to CAR's standalone credit profile, including elevated
refinancing, governance and business risks. These risks largely
offset CAR's leading position in China's car rental market, its
moderate debt leverage and its financial flexibility in reducing its fleet
to generate liquidity.
CAR's liquidity is weak. As of 30 June 2020, its cash balance
including restricted cash of RMB927 million was not sufficient to cover
its short-term debt of RMB5.2 billion, which included
a USD300 million bond that is due in February 2021.
In an announcement dated 1 September 2020, UCAR indicated its shares
would be delisted, following the company's inability to publish
its 2019 annual report by 31 August 2020[1].
UCAR had pledged its CAR shares as collateral for some of its borrowing
as of 30 June 2019[2], creating the risk of a change of control
that would accelerate CAR's debt repayments and impact its operations.
In its 10 November announcement, CAR disclosed that UCAR had entered
into a sale and purchase agreement with Indigo Glamour Company Limited,
under which the latter would acquire UCAR's 443 million CAR shares,
or about 20.9% of CAR's total issued share capital,
for a total consideration of HKD1.8 billion.
Indigo Glamour is a subsidiary of MBK Partners Fund IV, a private
investment fund managed by MBK Partners GP IV, L.P.
If the transaction is completed, Indigo Glamour will hold an approximate
20.9% stake in CAR.
The transaction is subject to the satisfaction or waiver of certain conditions
precedent, including approvals or confirmations from the relevant
government and regulatory authorities.
As of 30 June 2020, Legend Holdings Corporation holds shares that
represent about 26.6% of CAR's total issued capital,
while Amber Gem holds shares that represent about 14.8%
of CAR's total issued capital as of 10 November 2020.
Moody's views that the proposed introduction of Indigo Glamour (subsidiary
of a fund managed by MBK) as a shareholder could lower CAR's governance
risk. However, the transaction with Jinggangshan BAIC could
have potentially benefited CAR's funding access more significantly,
given that BAIC Group is a key shareholder in Jinggangshan BAIC with a
40% stake. BAIC Group is one of the top five automakers
in China by unit sales, and is a state-owned enterprise owned
by the Beijing Municipal Government through its parent company Beijing
State-owned Capital Operation and Management Center (A1 stable).
The coronavirus outbreak in China had reduced leisure and business travel,
pressuring CAR's revenue, particularly in 1Q20. However,
Moody's expects the impact of the outbreak on CAR's business will
continue to dissipate in 2H20 and onwards, reflecting China's
relatively effective containment of the virus.
Specifically, Moody's expects CAR's revenue will remain stable over
the next 12-18 months. Auto rental revenue will drop an
approximate 2% compared with the same period a year ago as a result
of a decline in its fleet size, although this will be offset by
a recovery in rental pricing. Revenue from used-vehicle
sales is expected to grow about 3% compared with the same period
a year ago as the company reduces its fleet to boost utilization and improve
liquidity.
Consequently, Moody's expects CAR's debt leverage, as measured
by adjusted debt/EBITDA, will remain stable at about 3.4x
over the next 12 months, as compared with 3.6x in the 12
months ended 30 June 2020, mainly reflecting a lower level of debt.
Moody's credit assessment also takes into account the following environmental,
social and governance (ESG) considerations.
Moody's regards the coronavirus outbreak as a social risk under its ESG
framework, given the substantial implications for public health
and safety. Today's action also reflects the impact on CAR of the
breadth and severity of the shock, and the broad deterioration in
credit quality and shifts in market sentiment it has triggered.
As for governance, the company has a diversified shareholder base
that includes major shareholders such as Legend Holdings Corporation.
However, CAR's rating continues to reflect governance risks
relating to its substantial shareholder UCAR.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Moody's could revise the outlook to stable if there is material
improvement in CAR's liquidity, access to funding and business operations,
along with a substantial reduction in the risk associated with UCAR's
shareholding.
Moody's could also downgrade the rating if the company fails to
meet its financial obligations or adhere to sound governance standards.
The principal methodology used in these ratings was Equipment and Transportation
Rental Industry published in April 2017 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1061773.
Alternatively, please see the Rating Methodologies page on www.moodys.com
for a copy of this methodology.
CAR Inc., founded in 2007 and headquartered in Beijing,
provides car rental services, including car rentals and fleet rentals
in China. It was listed on the Hong Kong Stock Exchange in September
2014.
REGULATORY DISCLOSURES
For further specification of Moody's key rating assumptions and
sensitivity analysis, see the sections Methodology Assumptions and
Sensitivity to Assumptions in the disclosure form. Moody's
Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
For ratings issued on a program, series, category/class of
debt or security this announcement provides certain regulatory disclosures
in relation to each rating of a subsequently issued bond or note of the
same series, category/class of debt, security 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
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For any affected securities or rated entities receiving direct credit
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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.
The ratings have been disclosed to the rated entity or its designated
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Moody's considers a rated entity or its agent(s) to be participating
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the rated entity is participating and the rated entity or its agent(s)
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for the Regulatory Disclosures for each credit rating action under the
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Regulatory disclosures contained in this press release apply to the credit
rating and, if applicable, the related rating outlook or rating
review.
Moody's general principles for assessing environmental, social
and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.
At least one ESG consideration was material to the credit rating action(s)
announced and described above.
The Global Scale Credit Rating on this Credit Rating Announcement was
issued by one of Moody's affiliates outside the EU and is endorsed
by Moody's Deutschland GmbH, An der Welle 5, Frankfurt
am Main 60322, Germany, in accordance with Art.4 paragraph
3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies.
Further information on the EU endorsement status and on the Moody's
office that issued the credit rating is available on www.moodys.com.
REFERENCES/CITATIONS
[1] Company Announcement 01-Sep-2020
[2] Company Interim Report 23-Aug-2019
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.
Gerwin Ho
VP - Senior Credit Officer
Corporate Finance 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
Clement Cheuk Yiu Wong
Associate Managing Director
Corporate Finance 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
