China Stock Turmoil 2015

China’s CITIC Securities and offshore arm downgraded by S&P on negative outlook

Declining credit profile by CITIC more than offsets possible government support, analysts say

PUBLISHED : Tuesday, 15 December, 2015, 1:48pm
UPDATED : Tuesday, 15 December, 2015, 1:48pm

Standard & Poor’s Ratings Services downgraded CITIC Securities and its core subsidiary CITIC Securities International because a police investigation of senior executives and a regulatory probe into the firm’s compliance practices “has significantly undermined” the business of both firms.

It is the first time S&P placed a “negative outlook” over CITIC and its overseas core unit CSI, after mainland Chinese authorities opened a probe into the company.

“The unexpected senior management reshuffle and the revealed gap in compliance practises among CITICs’ top managers suggest significant challenges for its business operations. These factors constrain the company’s otherwise very strong business position,” said the S&P report.

“In addition, CITIC may be liable to regulatory fines and sanctions if the Chinese authorities find the company to be partially responsible for any wrongdoings of the senior managers in police custody.”

“The negative outlook for the next 24 months reflects our view that heightened industry risk in China’s securities market could still pressurise CITICs’ credit profile. That’s despite the company’s solid capital buffer to cushion rising credit risks in the economy and possible financial fallouts from ongoing regulatory investigations.”

CITIC Securities Co. Ltd. (CITICS) and its core subsidiary CITIC Securities International Co.

Ltd. (CSI) were downgraded to ‘BBB’ from ‘BBB+’ in its long-term issuers’ credit rating.

Chinese authorities took away several top executives of CITIC for investigation in late August. S&P placed a “CreditWatch negative” on the company on September 17, which reminds investors of short-term risks.

The securities industry watchdog China Securities Regulatory Commission in November announced having started a formal investigation into CITIC as a company. By now, six of the eight-member core executive body of CITIC are being investigated by the authorities.

S&P affirmed the ‘A-2’ short-term rating on both companies.

Standard & Poor’s credit analyst Harry Hu said, “The negative impact of these factors on CITIC’s stand-alone credit profile more than offsets the one-notch rating uplift for our assessment of a ‘moderate’ likelihood that CITIC may receive extraordinary government support if needed.”

“We further believe that CITICs’ capital strength has materially eroded because of elevated market risks.”

In addition, S&P lowered the Greater China regional scale ratings for both companies to ‘cnA-/cnA-2’ from ‘cnA+/cnA-1’, and lowered all related issue ratings on CITICs’ debt, except the US$800 million bonds that are supported by Bank of China Ltd.’s standby letter of credit.

Additional reporting by Summer Zhen