Fitch Publishes Fenghui Leasing's 'B' Rating; Rates SPV's Notes
Fitch has also published the expected rating of 'B(EXP)' with Recovery Rating of 'RR4' on the senior unsecured notes to be issued by Silver Sparkle Limited (Silver Sparkle), a special-purpose vehicle (SPV) set up to issue the offshore notes on behalf of Fenghui.
Fenghui, based in Beijing in China, started its lending business in late 2009. It provides equipment leasing and entrusted loans, which made up 66% and 34% of total loans at end-2015, respectively. The company conducts business all over China, with a large share of the exposure in Shandong province and Beijing. The company's ownership changed in late 2015 when Shenzhen-listed Jinzhou Cihang Group bought a 90% stake. Jinzhou Cihang Group is in the business of jewelry design, distribution and sales.
The notes to be issued by Silver Sparkle will be unconditionally and irrevocably guaranteed by Fenghui, which plans to use the proceeds for general corporate purposes, including overseas investment. The notes are rated at the same level at Fenghui's Long-Term IDR with the Recovery Rating of 'RR4', reflecting average recovery prospects. The final rating on the proposed notes is contingent on the receipt of final documents conforming to information already received.
KEY RATING DRIVERS
FENGHUI'S IDRS AND SILVER SPARKLE'S SENIOR NOTES
Fenghui's IDRs reflect its weaker funding and liquidity profile, and a higher risk appetite compared with higher-rated issuers. Fenghui relies on funding from asset-backed securities and asset management products, which are sensitive to the asset quality of the underlying loans. Its liquidity is susceptible to volatility in China's liquidity conditions. In Fitch's view, Fenghui has a heightened risk profile based on the very strong asset growth in excess of the company's return on capital, its credit portfolio that is concentrated in electricity, gas and water suppliers and the real-estate sector, and a risk control system that is still developing compared with higher-rated issuers.
Fitch considers the company's franchise and management quality as secondary to its ratings. The recent change in the company's shareholders, the management team's limited track record with Fenghui, and the adoption of China's Generally Accepted Accounting Principles (GAAP) instead of International Financial Reporting Standards (IFRS) indicate that the corporate governance is still developing.
The ratings are supported by the company's modest use of encumbered assets, improving funding diversity and high profitability. Nonetheless, the high profitability may not fully reflect the inherent risk in the loan book's rapid growth and hence may not be sustained in a severe economic downturn or market stress when both funding and credit costs may rise sharply.
Provisions for credit losses are made on a basis of actual defaults and may be inadequate to capture unexpected losses. All loans are fully collateralised, but collection from customers in default may be a lengthy process. The company's NPL ratio (90 days overdue) was 2.8% with reserve to total loans ratio at 1.7% at end-2015.
The guaranteed notes issued by Silver Sparkle constitute general, unsecured and unsubordinated obligation of Fenghui and will rank pari passu with all other existing and future unsecured and unsubordinated obligations of Fenghui.
RATING SENSITIVITIES
FENGHUI'S IDRS AND SILVER SPARKLE'S SENIOR NOTES
Positive rating action may result if Fenghui sustains improvement in its funding and liquidity, and reduction in asset growth commensurate with internal capital generation.
Severe deterioration in liquidity and asset quality, or expansion of its risk appetite could lead to a rating downgrade.
As the senior notes issued by Silver Sparkle are guaranteed by Fenghui, the rating assigned to these notes would be sensitive to the same factors that drive the guarantor's IDR. In addition, the rating on the notes would be sensitive to the size of notes issuance relative to guarantor's unencumbered assets.
Комментарии