S&P downgrades CITIC as police move in on executives in China market turmoil

HONG KONG - Standard & Poor's today placed its 'BBB+/A-2' and 'cnA+/cnA-1' Greater China regional scale ratings on CITIC Securities Co. Ltd. (CITICS) and CITIC Securities International Co. Ltd. (CSI) on CreditWatch with negative implications.

It also placed all issue ratings on the debt of CITICS on CreditWatch with negative implications, except the 'A' long-term and 'cnAA+' Greater China scale ratings on the US$800 million bonds that Bank of China Ltd. guarantees.

The CreditWatch placement follows news reports that Chinese police have taken several senior company managers and employees, including its President, into custody following a probe into possible insider dealing and leaking of insider information during the recent equity market turmoil.

S&P says that according to news reports in late August, eight senior managers - including three on the executive committee - were in police custody as part of a similar investigation.

“In our opinion, the police probe on CITICS senior managers, together with heightened industry risk for Chinese securities companies and CITICS' elevated equity exposure to China's volatile equity market, could significantly undermine CITICS' credit profile,” S&P says.

"Although there are no visible signs that the probe has affected CITICS' business flow, we believe the widened police probe may pose significant challenges for CITICS' business operations over the longer run," says S&P credit analyst, Harry Hu.

"The impact could be acute if CITICS is found to be partially responsible for any wrongdoings by its senior managers, and therefore subject to regulatory sanctions."

S&P says it also sees growing downward pressure on CITICS' capital strength, given the company's elevated equity exposure.

“CITICS has contributed substantial capital, equivalent to 20% of its net assets, to the Government-run China Securities Finance Co. (CSFC), to stabilise the equity market. The elevated equity exposure subjects CITICS to substantially heightened market risks and may noticeably undermine the company's capital strength.

“This is despite CITICS' strong financial performance in the first half of 2015.”

Hu says: "We do not expect CITICS' funding and liquidity to be significantly affected by the probe and the market volatility. The company has a substantial cash position, limited reliance on wholesale funding, and very low financial leverage. We also expect CITICS to gain enhanced access to liquidity via CSFC.

“Our rating on CITICS does not factor in extraordinary Government support despite the Government's good track record of extending such support to many distressed Chinese securities firms in the past.

“Considering the Government's recent interventionist measures and the proactive role that CITICS has played in upholding some of the Government measures, we see a need to revisit CITICS' role to, and link with, the Chinese Government based on our criteria for Government-related entities.

“We placed our ratings on CSI on CreditWatch because we view the company as a core subsidiary of CITICS. As such, the ratings on the two entities move in tandem.

“We aim to resolve the CreditWatch placements once we have a clearer picture on: (1) the potential impact of the police investigation on CITICS' business position; (2) the company's exposure to credit and market risk in China; and (3) CITICS' ability to maintain its solid credit loss experience over the next one or two years, given the company's changing credit risk profile. We will also assess the likelihood of extraordinary Government support for the company.

“We expect to resolve the CreditWatch placement in the next three months. We do not expect the rating impact to be more than one notch.” www.standardandpoors.com  (ATI).