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Hong Kong, September 02, 2022 — Moody’s Investors Service has downgraded the local currency and foreign currency long-term issuer ratings of China Great Wall Asset Management Co., Ltd. (Great Wall AMC) to Baa1 from A3, and downgraded its Baseline Credit Assessment (BCA) to b1 from ba3.
Moody’s has also downgraded the long-term backed senior unsecured medium-term note (MTN) program rating of China Great Wall International Holdings III Limited (China Great Wall Int’l Holdings III Limited) to (P)Baa2 from (P)Baa1, and its long-term backed senior unsecured debt rating to Baa2 from Baa1.
The entity-level outlook on Great Wall AMC and China Great Wall Int’l Holdings III Limited is negative. Previously, the ratings were placed on review for downgrade. Today’s rating actions conclude Moody’s review for downgrade that was initiated on 5 July 2022.
The notes issued under the MTN program established by China Great Wall Int’l Holdings III Limited are guaranteed by China Great Wall AMC (Int’l) Hldgs Co Ltd (Great Wall International) and supported by keepwell deeds from Great Wall AMC.
A list of all affected ratings can be found at the end of this press release.
RATINGS RATIONALE
Great Wall AMC
Today’s rating actions, including the downgrade of Great Wall AMC’s BCA to b1 from ba3 and the subsequent downgrade of the ratings, reflect Great Wall AMC’s weakened profitability, capital position and asset quality due to its large net losses incurred in 2021, as well as the opacity and complexity of the company’s business.
The negative outlook reflects Moody’s expectation that Great Wall AMC’s financial metrics will continue to come under pressure in the next 12-18 months due to China’s slowing economic growth, a correction in the property market and disruptions caused by the coronavirus pandemic. It also takes into consideration the uncertainty in the timeliness and form of government support for the company.
Great Wall AMC reported net losses, attributable to shareholders of parent company, of RMB8,562 million in 2021, mainly due to fair value losses of RMB4,890 million and credit impairment losses of RMB14,088 million for the year. Its annualized return on average assets decreased to negative 1.3% in 2021 from 0.35% in 2020. Moody’s expects high fair value and impairment losses will continue to strain Great Wall AMC’s profitability in 2022 due to the property market correction and macroeconomic pressure.
The company’s capital position has weakened due to the large net losses in 2021. As of the end of 2021, its equity attributable to shareholders of parent company, excluding undated capital bonds, decreased to RMB46.4 billion from RMB55.8 billion as of the end of 2020. Based on Moody’s calculation, the company’s tangible common equity/tangible managed assets on a group consolidated basis decreased to 7.2% as of the end of 2021 from 8.9% as of the end of 2020.
The company issued RMB10 billions of undated capital bonds in September 2021, which helped replenish its tier-1 capital. However, Moody’s assesses that the company’s core equity tier-1 capital will remain under pressure due to its poor profitability and difficulty in raising equity capital from external investors.
Great Wall AMC is facing higher asset quality risk in its credit exposures and financial investments. In particular, the company has substantial exposure to property developers from its acquisition-and-restructuring distressed asset management business, through which it gains a fixed return by entering into a restructuring agreement with the original creditor and debtor. Although most of these credit exposures are for projects and are collateralized with low loan-to-value ratios, the company will need to charge more impairment losses if property sales and property prices remain weak. Apart from its property-related exposures, the company also provides financing to corporates of weak credit quality in other sectors under its acquisition-and-restructuring business.
Additionally, Great Wall AMC still holds some stock investments and unlisted equity investments because of its M&A business, whose fair value is sensitive to fluctuations in the stock market and would be under pressure given the weak economic growth in China. The company has been reducing its stock investments since 2019.
Great Wall AMC mainly relies on wholesale funds to support its asset base, which results in potential refinancing and liquidity risks. Nonetheless, Moody’s expects the company to maintain large amounts of credit lines from commercial banks despite its weakened financial metrics, due to its state-owned background. In addition, the size of Great Wall AMC’s offshore bonds is relatively small compared with those of other state-owned AMCs.
Moody’s has incorporated a six-notch uplift to Great Wall AMC’s ratings, considering the very high level of support from, and very high level of dependence on, the Chinese government (A1 stable) due to its ownership structure and strategic importance.
The Ministry of Finance owned 73.5% of the company as of the end of 2021. Additionally, Moody’s expects Great Wall AMC, like other state-owned AMCs, will continue to play a strategic role in helping China’s financial institutions and nonfinancial corporations dispose their distressed assets.
China Great Wall Int’l Holdings III Limited
China Great Wall Int’l Holdings III Limited’s (P)Baa2 long-term backed senior unsecured MTN program rating and Baa2 long-term backed senior unsecured debt rating incorporate Great Wall International’s b3 standalone assessment; a two-notch uplift of affiliate-backed level of support from Great Wall AMC; and a five-notch uplift based on a very high level of support from the Chinese government, via Great Wall AMC, when needed.
The b3 standalone assessment reflects Great Wall International’s volatile profitability, weak capital position, strained asset quality and heavy reliance on wholesale market funding.
The one-notch difference between Great Wall AMC’s Baa1 long-term issuer ratings and the offshore platform’s MTN and bond ratings reflects Moody’s view that keepwell deeds are different from explicit guarantees in terms of procedures of enforcement.
ENVIRONMENTAL, SOCIAL AND GOVERNANCE CONSIDERATIONS
Moody’s has lowered Great Wall AMC’s ESG Credit Impact Score to CIS-4 (highly negative) from CIS-3 (moderately negative), considering the negative impact of weak governance on its ratings. Its Governance Issuer Profile Scores is G-4 (highly negative), reflecting the company’s higher governance risk stemming from the opacity and complexity of its business model and organization structure, weakness in risk control, as well as its weaker reporting standard and information disclosures than industry’s best practice. Moody’s views its large losses in 2021 as a reflection of its weak financial strategy and risk control, which is part of our governance consideration, a key driver of today’s rating action.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
An upgrade of Great Wall AMC’s rating over the next 12-18 months is unlikely, given the negative outlook.
Moody’s could return the outlook to stable if there is evidence that the support from the central government strengthens, including supporting the company to replenish capital, as the company assumes greater strategic importance; or the company (1) improves its asset quality, profitability and capital positions despite the challenging operating environment; (2) maintains adequate funding and liquidity; and (3) improves its reporting and compliance standards.
Conversely, Moody’s could downgrade Great Wall AMC’s ratings if (1) the company’s financial metrics weaken further significantly, resulting in a downgrade of its BCA; or (2) Moody’s assesses that the level of government support for the company and its offshore funding platforms has significantly weakened.
Great Wall AMC’s BCA could be lowered if (1) its asset quality, profitability or capital base worsens significantly, with its tangible common equity/tangible managed assets below 5.5% on a sustained basis; (2) its funding and liquidity deteriorate; or (3) the company fails to meet the minimum regulatory requirements on capital adequacy and leverage ratios.
Moody’s could downgrade China Great Wall Int’l Holdings III Limited’s ratings if (1) Great Wall AMC’s long-term issuer rating is downgraded; or (2) Moody’s assesses that Great Wall AMC’s ability and willingness to support its overseas subsidiaries have weakened.
The principal methodologies used in rating China Great Wall Asset Management Co., Ltd. were Finance Companies Methodology published in November 2019 and available at https://ratings.moodys.com/api/rmc-documents/65543, and Government-Related Issuers Methodology published in February 2020 and available at https://ratings.moodys.com/api/rmc-documents/64864. The principal methodology used in rating China Great Wall International Holdings III Limited was Finance Companies Methodology published in November 2019 and available at https://ratings.moodys.com/api/rmc-documents/65543. Alternatively, please see the Rating Methodologies page on https://ratings.moodys.com for a copy of these methodologies.
Headquartered in Beijing, China Great Wall Asset Management Co., Ltd. reported consolidated assets of RMB642.9 billion as of the end of 2021.
LIST OF AFFECTED RATINGS
China Great Wall Asset Management Co., Ltd.:
• Long-term (local and foreign currency) issuer rating downgraded to Baa1 from A3
• Short-term (local and foreign currency) issuer rating confirmed at P-2
• BCA downgraded to b1 from ba3
• Entity-level outlook changed to negative from ratings under review
China Great Wall Int’l Holdings III Limited:
• Long-term (local currency) backed senior unsecured MTN program rating downgraded to (P)Baa2 from (P)Baa1
• Long-term (local currency) backed senior unsecured debt rating downgraded to Baa2 from Baa1
• Backed other short-term (local currency) rating confirmed at (P)P-2
• Entity-level outlook changed to negative from ratings under review
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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 on https://ratings.moodys.com/rating-definitions.
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 issuer/deal page for the respective issuer on https://ratings.moodys.com.
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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://ratings.moodys.com/documents/PBC_1288235.
At least one ESG consideration was material to the credit rating action(s) announced and described above.
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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
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Financial Institutions Group
Moody’s Investors Service Hong Kong Ltd.
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China (Hong Kong S.A.R.)
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Sophia Lee, CFA
Associate Managing Director
Financial Institutions Group
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Client Service: 852 3551 3077
Releasing Office:
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