18/10/2016/Fitch Ratings

Fitch Ratings-Hong Kong-18 October 2016: Fitch Ratings has published China Great Wall Asset Management Corporation’s (China Great Wall) Long-Term Foreign- and Local-Currency Issuer Default Ratings at ‘A’ with a Stable Outlook. Fitch has also assigned China Great Wall International Holdings III Limited’s (GWIII) proposed medium-term note (MTN) programme and the proposed first issue of US dollar senior unsecured notes under the programme expected ratings of ‘A(EXP)’.

The proceeds of the proposed note issue will be used for general corporate purposes. The final ratings on the proposed MTN programme and the proposed notes are contingent upon the receipt of final documents conforming to information already received.

The notes under the MTN programme, which will be issued by GWIII, are unconditionally and irrevocably guaranteed by Great Wall Pan-Asia International Investment Co., Limited (GWIIHK), a wholly owned subsidiary of China Great Wall. The notes under the MTN programme will be senior unsecured obligations of GWIIHK and rank pari passu with all other senior unsecured obligations of GWIIHK.

In place of a guarantee, China Great Wall has granted a keepwell deed and a deed of equity interest purchase, investment and liquidity support undertaking to ensure that the guarantor, GWIIHK, has sufficient assets and liquidity to meet its obligations under the guarantee for the notes under the MTN programme.

The notes under the MTN programme are rated at the same level of the IDR of China Great Wall, given the strong link between GWIIHK and China Great Wall, and the keepwell deed and deed of equity interest purchase, investment and liquidity support undertaking, which provide additional support and transfer the ultimate responsibility of payment to China Great Wall.

In Fitch’s opinion, the deeds signal a strong intention from China Great Wall to ensure that GWIIHK has sufficient funds to honour the debt obligations. The agency also believes GWIIHK intends to maintain its reputation and credit profile in the international offshore market, and is unlikely to default on offshore obligations. Additionally a default by GWIIHK could have significant negative repercussions on China Great Wall for any future offshore funding.

KEY RATING DRIVERS
Ratings Linked to Sovereign: China Great Wall’s ratings are credit-linked to those of the Chinese sovereign (A+/Stable) and notched down once. This reflects China Great Wall’s state-ownership and strong control by the authorities. China Great Wall’s strategic ties with the state means there is a strong likelihood that the company would receive extraordinary support from the government, if needed.

Legal Status Attributes Midrange: China Great Wall is registered as a wholly state-owned non-bank financial institution under China’s company law. The Ministry of Finance (MoF) has 100% ownership of China Great Wall and plans to introduce strategic investors and a public listing. The plan is the same for all four China’s state-owned asset management corporations (AMCs). Fitch expects the MoF to maintain a controlling stake in China Great Wall after the shareholding restructuring, which Fitch expects to be completed by early 2017.

Strategic Importance Attributes Stronger: Fitch considers China’s four largest AMCs to be groups with insignificant individual differentiation and highly necessary to absorb distressed debts. They are also instruments the government uses to avoid systemic risk and maintain confidence in the banking sector. In Fitch’s view, the state is highly likely to provide strong support to the company to ensure the stability of the financial market. Fitch does not believe the rapid expansion of China Great Wall’s non-policy business through natural growth negatively affects the company’s strategic importance as long as it remains a key player in its core business.

State Control Attributes Stronger: China Great Wall is directly controlled by the MoF and subject to the regulation and supervision of the China Banking Regulatory Commission (CBRC). The company’s senior management is scrutinised and appointed by CBRC, which also has significant influence over the company’s operations through industry and business-activity supervision.

Integration Attributes Midrange: The size of China Great Wall’s balance sheet is limited compared with China’s budget and the company does not receive on-going subsidies or capital injections from the government. China Great Wall’s financial liabilities at end-2015 accounted for less than 1% of China’s GDP. The People’s Bank of China granted China Great Wall a low-interest loan for its acquisition of policy non-performing assets in the past.

Capital Adequacy: China Great Wall has adequate risk and capital adequacy controls. After the shareholding restructuring led by MoF for all the four largest AMCs, Fitch expects China Great Wall’s capital adequacy ratio to increase further due to the increase in shareholder capital.

RATING SENSITIVITIES
Positive or negative rating action on the sovereign rating could result in similar changes to China Great Wall’s ratings. Stronger explicit support could lead to ratings being aligned with the sovereign rating.

Any significant dilution of China Great Wall’s core activities in the acquisition and management of non-performing assets could lead to wider notching down from the sovereign’s rating. This could also happen if there are significant changes to China Great Wall’s strategic importance to the state or if the state loses its controlling stake in the company and results in the company no longer classified as credit-linked to the state.

Any rating action on China Great Wall’s IDR would result in similar rating action on the programme and rated notes.