Fitch Ratings has affirmed CSSC (Hong Kong) Shipping Company Limited’s (CSSC HK Shipping) Long-Term Issuer Default Rating (IDR) and the rating on the senior unsecured note issued by CSSC Capital 2015 Limited at ‘A’. The Outlook on the Long-Term IDR is Stable.
CSSC HK Shipping was established in 2012 as a ship-leasing subsidiary of China State Shipbuilding Corporation (CSSC), the China’s leading state-owned shipbuilding conglomerate.
KEY RATING DRIVERS
CSSC HK Shipping’s rating reflects Fitch’s expectation of strong institutional support from CSSC, whose credit profile is based on the support from the China sovereign (A+/Stable). Fitch regards CSSC HK Shipping as a strategically important subsidiary of CSSC as it helps group clients to choose vessels and provides financing solutions to support CSSC’s core shipbuilding business. New orders referred by CSSC HK Shipping form a sizeable share of CSSC’s total new orders. Fitch expects the strong linkage between CSSC and CSSC HK Shipping to allow any sovereign support to flow to CSSC HK Shipping through CSSC.
The company’s fleet-rental business also has a strategic role in sustaining the group’s core business by providing new ship orders to the group’s shipyards during industry downturns and investing in new types of ships, which demonstrates the group’s shipbuilding capabilities to global clients.
CSSC HK Shipping’s management and operation are highly integrated with those of CSSC; the company shares the parent’s brand name and benefits from the group’s strong credit profile, which supports access to credit facilities from leading state banks and bond markets. CSSC guarantees some of CSSC HK Shipping’s banks borrowing and has injected capital into CSSC HK Shipping to support its business growth in the past few years.
CSSC HK Shipping’s standalone credit profile is considered moderate given its relatively short operating history, an assets growth higher than earnings retention and a less diversified funding profile. The company’s debt to tangible equity ratio of 2.4x at end-2019 was lower than that of other leasing peers in China, and Fitch expects the company to maintain the ratio at below 4x in the medium term as its annual asset growth target is in the low teens.
Fitch will reassess the support framework for CSSC HK Shipping if the ongoing merger between CSSC and China Shipbuilding Industry Company (CSIC) leads to a repositioning of the subsidiary in terms of support within the merged group. The detailed realignment plan for the subsidiaries under CSSC and CSIC remains unclear now.
The Stable Outlook reflects our expectation that CSSC HK Shipping’s strategically important role and close integration with its parent will not change meaningfully. The Outlook is consistent with Fitch’s view on the credit profile of CSSC and the Chinese sovereign rating, and reflects our view that the relationship between CSSC and the China sovereign will remain unchanged.
SENIOR UNSECURED DEBT
CSSC Capital 2015 is CSSC HK Shipping’s wholly owned offshore special-purpose vehicle registered in the British Virgin Islands. The rating on the senior unsecured notes issued by CSSC Capital 2015 is in line with CSSC HK Shipping’s IDR as the notes are unconditionally and irrevocably guaranteed by CSSC HK Shipping and will at all times rank pari passu with all CSSC HK Shipping’s other direct, unsubordinated, unconditional and unsecured obligations.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
CSSC HK Shipping’s IDR would be downgraded if there is any sign of weakening in the linkage between CSSC HK Shipping and CSSC, which could arise from significant ownership dilution, a reduction in CSSC HK Shipping’s strategic role in the group as evidenced by notable expansion in other leasing businesses not linked to the parent’s core business.
Any negative change in Fitch’s internal view on CSSC’s credit profile, which could reflect a shift in the perceived willingness or ability of the China sovereign to support CSSC in a full and timely manner, could lead to negative rating action. A downgrade of China’s sovereign rating would affect CSSC HK Shipping’s ratings by the same magnitude.
In addition, the ratings of CSSC HK Shipping would be under pressure if there is a reduction in CSSC HK Shipping’s strategic importance in the merged group after the merger between CSSC and CSIC is completed.
The rating on the notes is equalised with CSSC HK Shipping’s IDR, and will move in tandem with any change to CSSC HK Shipping’s rating.
The note ratings could also be downgraded if there is a significant adverse change in China’s capital-account regulations that restrain CSSC from providing timely cross-border support for CSSC HK Shipping to service its debt obligation.
Factors that could, individually or collectively, lead to positive rating action/upgrade:
CSSC HK Shipping’s IDR could be upgraded if its linkage with CSSC strengthens such that the company becomes exclusively captive and a wholly owned subsidiary or if there is any positive change in Fitch’s view on China’s sovereign rating.
The rating on the notes is equalised with CSSC HK Shipping’s IDR and will be upgraded if CSSC HK Shipping is upgraded.
Source: Fitch Ratings