Fitch Ratings has maintained the Rating Watch Evolving (RWE) on China Huarong Financial Leasing Co., Ltd.'s (Huarong Financial Leasing) Long-Term Issuer Default Rating (IDR) of 'BBB-' and Shareholder Support Rating (SSR) of 'bbb-'.
Fitch has also maintained the RWE on its wholly owned subsidiary Huarong Leasing Management Hong Kong Company Limited's (Huarong Leasing Management HK) Long-Term IDR of 'BBB-', and the 'BBB-' rating of the subsidiary's USD1 billion medium-term note (MTN) programme.
Resolution of the Rating Watches will occur upon further development of China Huarong Asset Management Co., Ltd.'s (China Huarong, BBB+/Stable) sale plan for Huarong Financial Leasing, which may take place more than six months in the future. China Huarong announced its plan to dispose of Huarong Financial Leasing in November 2021, but there have been no material developments in the plan since then. Huarong Financial Leasing's ratings have been on RWE since August 2021.
Key Rating Drivers
Uncertainty over Sale Plan: The RWE on Huarong Financial Leasing's Long-Term IDR is driven by the uncertainty around the ongoing sale plan announced by China Huarong in November 2021 and our view that Huarong Financial Leasing's rating could be upgraded, downgraded or remain the same after we reassess its credit profile when a new core shareholder is identified.
Shareholder Support Still in Place: Huarong Financial Leasing's ratings remain underpinned by our expectation of support from China Huarong and reflect the parent's obligation to provide capital and liquidity support, as the regulations for financial leasing companies and Huarong Financial Leasing's articles of association require. However, China Huarong's plan to sell Huarong Financial Leasing suggests the subsidiary's strategic importance has decreased in the group's restructuring plan, resulting in the parent's weaker propensity to support.
In a stressed scenario, the support required could also be considerable relative to China Huarong's ability to provide it, given its weakening capitalisation and asset-quality pressure. Huarong Financial Leasing's 'bbb-' SSR is aligned with its IDR and indicates the minimum level to which the IDR could fall if Fitch does not change its view on potential support from China Huarong. An SSR of 'bbb-' indicates a high probability of strong support being forthcoming.
Moderate Standalone Strength: Huarong Financial Leasing's standalone credit profile (SCP) does not directly drive its IDR, but it is likely to be sub-investment grade due to the company's average franchise in China's leasing sector, modest profitability and above-peer average impaired ratio. Its leverage has declined since 2020 because of its shrinking asset size amid the challenging operating environment and uncertainly around China Huarong's restructuring plan.
Subsidiary and Debt Rating: Fitch assesses Huarong Leasing Management HK as being highly integrated with Huarong Financial Leasing's core activities. China Huarong, the ultimate parent, manages Huarong Leasing Management HK as an integral part of Huarong Financial Leasing. A default by Huarong Leasing Management HK would create high reputational risk for Huarong Financial Leasing and China Huarong, as counterparties also generally see Huarong Leasing Management HK as an integral part of the group.
The rating on Huarong Leasing Management HK's MTN programme is in line with its IDR of 'BBB-', as the notes issued under the programme constitute direct, unconditional, unsubordinated and unsecured obligations of the company.
RATING SENSITIVITIES
Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade
Huarong Financial Leasing's IDR and SSR are underpinned by the shareholder support from China Huarong. Negative changes in China Huarong's rating could therefore lead to a negative rating action for Huarong Financial Leasing of at least the same magnitude.
The IDR and SSR are also susceptible to any sign of further weakening support propensity from China Huarong, such as changes in the regulatory obligation for China Huarong to provide capital and liquidity support or a significant reduction in ownership. A sale to a key shareholder with a lower rating would lead to a downgrade.
If the shareholder support cannot be relied on, or the rating based on shareholder support falls below the rating based on the SCP, the ratings would be reassessed based on its SCP, which is multiple notches below the IDR because of the modest franchise, weak profitability and high leverage.
Changes in Huarong Financial Leasing's rating would affect Huarong Leasing Management HK's rating by the same magnitude. Any major restructuring that adversely affects the role and importance of Huarong Leasing Management HK to Huarong Financial Leasing could also lead to wider notching between their ratings.
Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade
The ratings of Huarong Financial Leasing and Huarong Leasing Management HK, including IDRs, SSR and rating on the MTN programme, remain linked to the rating of China Huarong until the new shareholder is identified. An upgrade of China Huarong's rating could lead to an upgrade of the ratings of Huarong Financial Leasing and Huarong Leasing Management HK if our assessment of China Huarong's propensity and ability to support remains unchanged without further weakening.
The introduction of a new core shareholder rated higher than China Huarong could also be rating positive.
DEBT AND OTHER INSTRUMENT RATINGS: KEY RATING DRIVERS
The rating on Huarong Leasing Management HK's MTN programme is in line with its IDR of 'BBB-'.
DEBT AND OTHER INSTRUMENT RATINGS: RATING SENSITIVITIES
The rating on Huarong Leasing Management HK's MTN programme will move in tandem with Huarong Leasing Management HK's IDR.
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. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
Public Ratings with Credit Linkage to other ratings
Huarong Financial Leasing's ratings are driven by shareholder support and linked to the rating of China Huarong.
ESG Considerations
Huarong Financial Leasing has an ESG Relevance Score of '4' for Management Strategy due to China Huarong's continued non-core business divestment, investment risk and legacy asset management. China Huarong's ability to execute its strategy under capital constraints remains a relevant consideration in the company's focus on its policy role, which has a negative impact on Huarong Financial Leasing's credit profile, and is relevant to the ratings in conjunction with other factors.
Huarong Financial Leasing has an ESG Relevance Score of '4' for Governance Structure due to recent changes of China Huarong's largest shareholder. The new ownership structure and associated governance framework has a negative impact on Huarong Financial Leasing's credit profile, and is relevant to the ratings in conjunction with other factors.
Huarong Financial Leasing has an ESG Relevance Score of '4' for Financial Transparency due to limited transparency over China Huarong's asset quality and the asset quality of China's leasing sector in general, which has a negative impact on China Huarong's and Huarong Financial Leasing's credit profiles, and is relevant to the ratings in conjunction with other factors.
The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' 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. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores.
CHINA CITIC FINANCIAL ASSET MANAGEMENT CO., LTD. 
