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Moody eyes downgrade for China Everbright

China's economic downturn will put pressure on management and performance fees, hitting asset management group China Everbright.

Moody’s Investors Service has placed China Everbright’s Baa2 long-term issuer rating and P-2 short-term issuer rating under review for downgrade, according to a statement from the ratings agency.

The ratings firm cited the coronavirus impact and plunging oil, mentioning “the breadth and severity of the shock, and the deterioration in credit quality it has triggered”, according to the statement.

“[T]he growing scope of the economic downturn in China and globally will strain [China Everbright’s] profitability — including management and performance fees in the fund management business, and investment income in the principal investment business as a result of lower market valuations.”

The previous outlook for the company was stable.

“The rapid and widening spread of the coronavirus outbreak, deteriorating global economic outlook, falling oil prices, and asset price declines are creating a severe and extensive credit shock across many sectors, regions and markets,” the statement said.

“CE (China Everbright) has been one of the companies affected by the shock given its principal financial investments and its business in raising and managing funds that invest in primary and secondary markets.”

Increasing debt

China Everbright’s debt/ebitda ratio (as calculated by Moody’s) has continued to rise in recent years reaching a very high level of 8.4x as of the end of 2019, driven by increased bank borrowings and debt issuances to support the growth of its principal investment and fund management businesses, according to the statement.

The increase was also partly driven by the consolidation of Ying Li International Real Estate in which the group recently increased its ownership interest to 72%.

Moreover, the statement noted that the company has a 36% equity interest in the aircraft lessor China Aircraft Leasing Group at a time when aviation globally has all but come to a standstill.

CE’s current Baa2/P-2 issuer ratings already has baked-in a three-notch uplift, based on the assumption that “the company would receive a very high level of affiliate support and indirect government support from China Everbright Group via China Everbright Bank Company in times of need”.

Given that CE’s ratings are under review for downgrade, it is unlikely that they will be upgraded in the near term, the statement added.

Green OBOR fund

Separately, China Everbright announced the launch of a private fund called Everbright Belt & Road Green Fund, according to a statement from the firm.

It appears to be a fund of funds combined with the provision for direct institutional investment. The universe is countries and regions along China’s massive One Belt, One Road infrastructure project. The focus is on four areas: green environment, green energy, green manufacturing and green living, according to the statement.

Targeted AUM is RMB 20bn ($2.8bn).

Headquartered in Hong Kong, China Everbright is an  asset management firm focused on cross-border and private equity investments.

It is the only listed company in Hong Kong with alternative asset management as its core business. As of the end of 2019, it managed 69 funds with total assets of HK$ 157bn ($20.3bn), according to the statement.

Part of the Mark Allen Group.