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Rating Action:

Moody's confirms Huarong AMC at Baa2; outlook stable

 The document has been translated in other languages

29 Nov 2021

Hong Kong, November 29, 2021 -- Moody's Investors Service has confirmed the local currency and foreign currency long-term and short-term issuer ratings of China Huarong Asset Management Co., Ltd. (Huarong AMC) at Baa2/P-2. The outlook is changed to stable from ratings under review. This concludes Moody's review for downgrade that was initiated on 13 April 2021.

At the same time, Moody's has placed Huarong AMC's Baseline Credit Assessment (BCA) of caa2 on review for upgrade.

In addition, Moody's has confirmed the long-term backed senior unsecured debt ratings of Huarong AMC's offshore financing vehicles -- including Huarong Finance 2017 Co., Ltd, Huarong Finance II Co., Ltd and Huarong Finance 2019 Co., Ltd. -- at Baa3, and their long-term backed senior unsecured medium-term note (MTN) program ratings at (P)Baa3. Moody's has also confirmed the short-term backed senior unsecured MTN program ratings of Huarong Finance 2019 Co., Ltd. at (P)P-3. The entity-level outlook on these financing vehicles is changed to stable from ratings under review. This concludes Moody's review for downgrade that was initiated on 13 April 2021.

A list of all affected ratings can be found at the end of this press release.

RATINGS RATIONALE

Huarong AMC

The confirmation of Huarong AMC's ratings with a stable outlook reflects the company's planned recapitalization through an equity placement and Moody's assessment of a very high level of support from and a very high level of dependence on the Government of China (A1 stable) under Moody's joint-default analysis approach for government-related issuers.

The placing of Huarong AMC's BCA on review for upgrade reflects the material enhancement of Huarong AMC's capital positions when the planned equity placement and disposal of financial services subsidiaries are completed, as well as the likely improvement in its asset quality and profitability.

Huarong AMC announced on 17 November 2021 that it had entered into share subscription agreements with five investors, including CITIC Group Corporation (A3 stable), China Insurance Investment Co., Ltd., China Cinda Asset Management Co., Ltd. (Cinda AMC, A3 review for downgrade), China Life Insurance (Group) Company and ICBC Financial Asset Investment Co., Ltd., to raise no more than RMB42 billion of equity capital[1]. According to Huarong AMC, the placement, which it wants to complete before the end of 2021, will improve its capital adequacy to meet the regulatory requirement. As of 30 June 2021, Huarong AMC's total capital adequacy ratio on the parent company level was 6.32%, lower than the minimum regulatory requirement of 12.5%.

Moody's assesses that the execution risks of the equity raising are low given the involvement of the Chinese government and state-owned enterprises in the bail-out plan. To complete the placement, Huarong AMC needs the approval from a shareholders' general meeting and class meetings, aside from regulatory approvals from the China Banking and Insurance Regulatory Commission and the China Securities Regulatory Commission, and the listing approval for issuance of H-shares from the Hong Kong Stock Exchange.

In addition, Huarong AMC's planned disposal of financial services subsidiaries, including banking, leasing, securities and consumer finance subsidiaries, if successful, will materially reduce Huarong AMC's asset scale and further improve its capital positions. As of 30 June 2021, Huarong AMC's banking and leasing subsidiaries accounted for 25.9% and 8.5%, respectively, of Huarong AMC's consolidated total assets.

Moody's will continue to classify Huarong AMC as a government-related issuer and maintain the assumption of a very high level of government support, because the Ministry of Finance will remain Huarong AMC's largest shareholder after the completion of the equity placement, although its shareholding will be diluted to 27.76% from 57.02%. In addition, the government has coordinated funding and capital support for Huarong AMC to help it repay matured debts and restore its capital positions, which demonstrates the government's willingness to support in times of need. Moody's has also taken into consideration Huarong AMC's role in helping financial institutions and non-financial corporations dispose their distressed assets.

The review on Huarong AMC's BCA will focus on (1) Huarong AMC's capital positions post-transaction; (2) the outlook for Huarong AMC's asset quality and profitability amid the correction in China's property market and the uneven economic recovery following the coronavirus pandemic.

Moody's considers the implication of Huarong AMC's announced equity placement on the company's governance under its environmental, social, and governance (ESG) framework, given its impact on the company's board structure, policies and procedures. After the completion of the equity placement, CITIC Group Corporation and China Insurance Investment Co., Ltd. will hold 23.46% and 18.08% of Huarong AMC, respectively, and will have rights to nominate directors on Huarong AMC's board, which could improve Huarong AMC's corporate governance and internal controls. Today's actions reflect the impact of potential improvement in governance on Huarong AMC's credit quality.

Huarong AMC's offshore financing vehicles

The (P)Baa3 long-term backed senior unsecured MTN program ratings and the Baa3 long-term backed senior unsecured debt ratings of Huarong Finance 2017 Co., Ltd, Huarong Finance II Co., Ltd and Huarong Finance 2019 Co., Ltd. incorporate 1) Huarong International Holdings Limited (Huarong International)'s caa3 standalone assessment, 2) a nine-notch uplift based on Moody's assumption of support from Huarong AMC and indirectly from the Chinese government through its parent.

The notes issued under the MTN program established by these three offshore financing vehicles are guaranteed by Huarong International and supported by keepwell deeds from Huarong AMC.

The caa3 standalone assessment reflects Huarong International's poor capital adequacy and profitability, asset quality pressure, as well as weakened funding and liquidity profiles.

Moody's assesses that Huarong International is virtually inseparable from Huarong AMC because of the complex interlinkages, and government support would flow via Huarong AMC to Huarong International in times of need. Huarong International is positioned as Huarong AMC's primary offshore funding and investment platform. A failure by Huarong AMC to support Huarong International would result in significant business, operational and reputational risks for Huarong AMC.

The one-notch difference between Huarong AMC's long-term issuer rating and the long-term debt ratings of these offshore financing vehicles reflects that keepwell deeds are different from an explicit guarantee in terms of the nature of judgment and procedures of enforcement.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

Huarong AMC's ratings could be upgraded if (1) Moody's believes that support from the central government will strengthen as the company assumes greater strategic importance; or (2) the company's BCA significantly strengthens.

Huarong AMC's BCA could be upgraded if the company materially strengthens its capital base through a timely equity placement by investors and disposal of subsidiaries, with its tangible common equity/tangible managed assets ratio above 3.5% on a sustained basis; the company's asset quality and profitability improve; and the company's funding and liquidity remain adequate.

Huarong AMC's ratings could be downgraded if the planned recapitalization fails to obtain the necessary approvals and is not quickly replaced by an alternative rescue plan.

It is unlikely that Huarong AMC's BCA will be downgraded in the next 12-18 months because the BCA is on review for upgrade. However, renewed asset quality pressure that again threatens the solvency of Huarong AMC even after the planned capital injection would be negative for the BCA.

The ratings of Huarong AMC's offshore financing vehicles could be changed if Huarong AMC's long-term issuer rating is changed, or Moody's assesses that Huarong AMC's ability and willingness to support its overseas subsidiaries have changed.

The principal methodologies used in rating China Huarong Asset Management Co., Ltd. were Finance Companies Methodology published in November 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1187099, and Government-Related Issuers Methodology published in February 2020 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1186207. The principal methodology used in rating Huarong Finance 2017 Co., Ltd., Huarong Finance 2019 Co., Ltd., and Huarong Finance II Co., Ltd was Finance Companies Methodology published in November 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1187099. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of these methodologies.

Headquartered in Beijing, China Huarong Asset Management Co., Ltd. reported consolidated assets of RMB1,605.6 billion as of 30 June 2021.

LIST OF AFFECTED RATINGS

China Huarong Asset Management Co., Ltd.:

• Long-term (local and foreign currency) issuer rating confirmed at Baa2

• Short-term (local and foreign currency) issuer rating confirmed at P-2

• BCA of caa2 changed to review for upgrade from review for downgrade

• Entity-level outlook is changed to stable from ratings under review

Huarong Finance 2017 Co., Ltd:

• Long-term (local currency) backed senior unsecured MTN confirmed at (P)Baa3

• Long-term (local currency) backed senior unsecured debt rating confirmed at Baa3(hyb)

• Long-term (local and foreign currency) backed senior unsecured debt rating confirmed at Baa3

• Entity-level outlook is changed to stable from ratings under review

Huarong Finance II Co., Ltd:

• Long-term (local currency) backed senior unsecured MTN confirmed at (P)Baa3

• Long-term (local currency) backed senior unsecured debt rating confirmed at Baa3

• Entity-level outlook is changed to stable from ratings under review

Huarong Finance 2019 Co., Ltd.:

• Long-term (local and foreign currency) backed senior unsecured MTN confirmed at (P)Baa3

• Short-term (local and foreign currency) backed senior unsecured MTN confirmed at (P)P-3

• Long-term (local currency) backed senior unsecured debt rating confirmed at Baa3

• Entity-level outlook is changed to stable from ratings under review

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 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.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

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 entities are participating and the rated entities or their agent(s) generally provide 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.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1288235.

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.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

REFERENCES/CITATIONS

[1] https://www1.hkexnews.hk/listedco/listconews/sehk/2021/1117/2021111701162.pdf 17-Nov-2021

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.

David Jinhua Yin
VP - Senior Credit Officer
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

Sophia Lee, 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

No Related Data.
© 2022 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

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