Fitch Affirms CSSC (Hong Kong) Shipping at ‘A’; Outlook Stable
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. Fitch has also assigned a Shareholder Support Rating (SSR) of ‘a’ to CSSC HK Shipping, in line with our updated Non-Bank Financial Institutions Rating Criteria published 31 January 2022.
CSSC HK Shipping is the only leasing subsidiary of China Shipbuilding Group Corporation (CSG), the world’s largest shipbuilding conglomerate formed by the merger of China State Shipbuilding Corporation (CSSC) and China Shipbuilding Industry Company. CSG controls 75% of CSSC HK Shipping through CSSC.
KEY RATING DRIVERS
CSSC HK Shipping’s rating reflects Fitch’s expectation of strong institutional support from CSG, 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 CSG, servicing the parent’s core shipbuilding business. The rating also reflects Fitch’s expectation of sovereign support flowing through CSG to CSSC HK Shipping in times of need, based on the strong linkage and synergy between the two companies.
CSSC HK Shipping provides financing solutions to group clients and facilitates the sales of ships built by the group. Its own fleet-rental business has been particularly important in sustaining the group’s shipbuilding business during industry downturns, while its investment in new types of ships demonstrates the group’s shipbuilding capabilities to global clients. CSSC HK Shipping’s management and operations are highly integrated with those of CSG, which exercises strong influence over the leasing subsidiary’s business and financial planning. CSSC HK Shipping has also benefitted from the group’s strong franchise for business development and funding access.
Fitch assesses CSSC HK Shipping’s standalone credit profile as sub-investment grade due to its moderate company franchise, business cyclicality and untested underwriting standards due to its relatively short operating history. The company’s debt-to-tangible equity ratio increased to 2.9x by end-2021 from 2.3x at end-2020 as a result of its strong asset growth amid a tight global shipping market during the Covid-19 pandemic disruptions. CSSC HK Shipping’s debt-to-tangible equity ratio is lower than that of other Chinese leasing peers, but Fitch believes it is commensurate with its monoline business model in a more cyclical ship leasing sector.
The Stable Outlook reflects Fitch’s expectation that CSSC HK Shipping’s strategically important role and close integration with CSG will not change meaningfully. The Outlook is consistent with Fitch’s view on the credit profile of CSG and the Chinese sovereign rating, which reflects the agency’s view that the relationship between CSG and the Chinese 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 CSG, which could arise from significant ownership dilution, or a reduction in CSSC HK Shipping’s strategic role in the group, which would be evident from a notable expansion in other leasing businesses not linked to the parent’s core business.
Any negative change in Fitch’s internal view on CSG’s credit profile, which could reflect a shift in the perceived willingness or ability of the Chinese sovereign to support CSG 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.
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 CSG 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 CSG strengthens, such that the company becomes exclusively captive and a wholly owned subsidiary, or there is a significant increase in the portion of ships built by the group that is sold and financed by CSSC HK Shipping.
Any positive change in Fitch’s view on CSG and, ultimately, China’s sovereign rating, would also affect CSSC HK Shipping’s ratings.
The rating on the notes will only be upgraded if CSSC HK Shipping is upgraded.
BEST/WORST CASE RATING SCENARIO
International scale credit ratings of Financial Institutions and Covered Bond issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from ‘AAA’ to ‘D’. Best- and worst-case scenario credit ratings are based on historical performance.
Fitch has revised the ESG Relevance Score on Financial Transparency to ‘3’ from ‘4’, as we think the company’s quality and timing of financial reporting and auditing process are adequate, and have no impact on the rating consideration. We see the issue of generally limited transparency around asset quality performance as less relevant to the rating assessment of CSSC HK Shipping than that of other Chinese state-linked lessors.
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of ‘3’. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity.
The rated entity (and/or its agents) or, in the case of structured finance, one or more of the transaction parties participated in the rating process except that the following issuer(s), if any, did not participate in the rating process, or provide additional information, beyond the issuer’s available public disclosure.
Source: Fitch Ratings