CMG has a track record of providing various forms of support to China Merchants Commerce Leasing, including shareholder loans, guarantees, capital injections and client referrals.
The company's leverage, as measured by total assets divided by shareholders' equity, stood at a relatively low level of 6.9x as of the end of 2019, rising from 6.1x as of the end of 2017. To support its rapid asset growth during 2017-19, CMG made capital injections of RMB1.5 billion in 2017 and RMB2.0 billion in 2018.
As of the end of 2019, the company's nonperforming asset ratio stayed at a low level of 0.67%. However, the asset quality of its leasing assets is unseasoned because of its short operation history. The company has large and concentrated exposures to cyclical sectors, such as marine engineering, shipping and port, which are mitigated by the fact that the majority of its clients in these sectors are related to or referred by CMG.
China Merchants Commerce Leasing's profitability is relatively low compared to other rated leasing companies, mainly because of its CMG-related marine engineering business, which is non-profit-driven.
Like other leasing companies in China, China Merchants Commerce Leasing relies heavily on confidence-sensitive wholesale funding. The intrinsic weakness in the company's liquidity also stems from a mismatch between the duration of its assets and liabilities, which exposes it to interest rate risk and refinancing risk. These risks are mitigated by the company's affiliation with CMG and the large amounts of credit lines from various banks. In addition, the company has been increasing its long-term funding through bond issuances.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Moody's could upgrade China Merchants Commerce Leasing's ratings if CMG demonstrates an increased ability and willingness to support its subsidiary. Moody's could also upgrade the company's standalone assessment if it enhances its franchise, lowers concentration risk, maintains good asset quality, reduces the duration mismatch between its assets and liabilities, and strengthens its capital ratio relative to its managed assets.
Conversely, Moody's could downgrade China Merchants Commerce Leasing's ratings if (1) CMG or the Chinese government shows less willingness or ability to support the company; or (2) its asset quality deteriorates and credit costs rise, while its liquidity and funding profiles as well as capital levels weaken.
The principal methodology used in these ratings 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 this methodology.
Registered in Tianjin, China Merchants Commerce Financial Leasing Co., Ltd. reported assets of RMB37.2 billion (approximately USD5.3 billion) as of the end of 2019.
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 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.
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.
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 Yin Vice President - Senior 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 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
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