Alternative Investment

Research: Rating Action: Moody’s affirms China Everbright Limited’s Baa3/P-3 ratings, changes outlook to negative from stable

Hong Kong, September 15, 2022 — Moody’s Investors Service has affirmed the local currency and foreign currency long-term and short-term issuer ratings of China Everbright Limited at Baa3/P-3. Moody’s has also maintained the company’s standalone assessment at Ba3.

In addition, Moody’s has affirmed the Baa3(hyb) foreign currency long-term rating of China Everbright Limited’s senior unsecured perpetual notes.

At the same time, Moody’s has changed the entity-level outlook on China Everbright Limited to negative from stable.

RATINGS RATIONALE

The outlook change to negative from stable reflects (1) the company’s weakened financial position after reporting net losses in the first half of 2022 due to the volatile capital market and (2) the increasing operating challenges facing the company’s fund management and investment businesses.

China Everbright Limited reported net losses attributable to shareholders of HKD2.7 billion in the first half of 2022, mainly because of the unrealized loss and revaluation on (1) the private equity investment projects held by the company that have been listed but not yet exited and (2) the investments in the secondary market funds, driven by the sluggish capital market.

While the unrealized loss has no direct cash flow impact on the company, its shareholders’ equity decreased by 11% to HKD41.7 billion in the first half of 2022, mainly because of the net losses, investment revaluation and exchange adjustment. It also weakened the company’s financial position to face ongoing volatilities in the capital market. The company’s debt-to-Moody’s adjusted EBITDA has rose above 9.0x which is a very high level.

Additionally, Moody’s expects that fluid financial market conditions and China’s economic slowdown in the wake of COVID-19 resurgences will affect the company’s fundraising activities and investment disposals, and continue to pose uncertainties to its profitability and deleveraging timeline in the next 12 to 18 months.

The affirmation of China Everbright Limited’s Baa3/P-3 issuer ratings considers (1) the company’s growing franchise in the cross-border alternative asset management business, (2) its long-term fundraising ability that supports its assets under management (AUM) resilience, and (3) the very high level of affiliate and indirect government support the company will likely receive via China Everbright Group and the group’s largest subsidiary, China Everbright Bank Company Limited (Baa2 stable, Baseline Credit Assessment: ba2), when needed. China Everbright Limited will remain strategically important to the group as it  continues to develop its overseas and international business. Therefore, the company’s Baa3/P-3 issuer ratings continue to incorporate three notches of uplift.

China Everbright Limited’s AUM maintains stable growth in the past two years. Despite the challenging operating environment and the impact from the pandemic, the company still could raise HKD1.35 billion in new funds in the first half of 2022. Although its AUM fell by 2.9% to HKD197.3 billion in the first half of 2022, the decline was primarily due to the depreciation of the renminbi.

As of the end of June 2022, the company maintained a stable liquidity pool with HKD10.4 billion of cash, along with HKD7.3 billion of investments, which are level 1 assets that can be readily converted to cash. The company also had approximately HKD7 billion of undrawn bank facilities as of the end of June 2022.

ENVIRONMENTAL, SOCIAL AND GOVERNANCE (ESG) CONSIDERATIONS

China Everbright Limited’s ESG Credit Impact Score is CIS-3 (moderately negative) and its Governance Issuer Profile Scores is G-3 (moderately negative), reflecting the moderate impact of governance risk on the current rating. The company’s consistently higher leverage than that of many rated traditional asset managers reflects that it faces moderate risk in financial strategy and risk management.

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

Given the negative outlook, an upgrade of China Everbright Limited’s ratings is unlikely.

However, Moody’s could return the outlook on China Everbright Limited to stable if the company (1) reduces its leverage materially and maintains its debt-to-Moody’s adjusted EBITDA at below 9.0x, (2) maintains its AUM resilience and improves its geographic and product diversification, and (3) recovers its pre-tax income margin to pre-pandemic level and maintains stable revenue growth.

Moody’s could downgrade China Everbright Limited’s issuer ratings if it assesses that (1) support from China Everbright Group and the Government of China (A1 stable) declines, or China Everbright Bank’s ratings are downgraded, (2) China Everbright Limited’s strategic importance and connection within the Group reduces; or (3) the shareholding of China Everbright Group declines.

China Everbright Limited’s issuer ratings could also be downgraded if (1) the company’s scale and franchise in China’s alternative asset management sector decline, resulting in significantly weaker AUM resilience, (2) its profitability further deteriorates, which could arise from lower revenue, investment losses and/or sequential losses, or (3) its debt-to-Moody’s adjusted EBITDA remains above 9.0x.

The principal methodology used in these ratings was Asset Managers Methodology published in November 2019 and available at https://ratings.moodys.com/api/rmc-documents/65403. Alternatively, please see the Rating Methodologies page on https://ratings.moodys.com for a copy of this methodology.

Headquartered in Hong Kong SAR, China, China Everbright Limited reported assets of HKD96.3 billion as of the end of June 2022.

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 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.

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 https://ratings.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 https://ratings.moodys.com for the Regulatory Disclosures for each credit rating action, shown on the issuer/deal page, and for Moody’s Policy for Designating Non-Participating Rated Entities, shown on https://ratings.moodys.com.

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.

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 https://ratings.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 https://ratings.moodys.com.

Please see https://ratings.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 issuer/deal page on https://ratings.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.

Sean Hung, CFA
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

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