China Car Funding Investment 2015

Transcription

1 Presale: China Car Funding Investment 2015 Primary Credit Analyst: Luke Elder, Melbourne (61) ; Secondary Contact: Andrea Lin, Taipei (886) ; andrea.lin@taiwanratings.com.tw Table Of Contents Profile Rationale Transaction Structure Note Terms And Conditions Rating-Transition Analysis Loan Servicing Asset Characteristics And Credit Analysis Analytical Contacts Related Criteria And Research SEPTEMBER 2,

2 Presale: China Car Funding Investment 2015 This presale report is based on information as of Sept. 2, The ratings shown are preliminary. This report does not constitute a recommendation to buy, hold, or sell securities. Subsequent information may result in the assignment of final ratings that differ from the preliminary ratings. Preliminary Ratings As Of Sept. 2, 2015 Class Preliminary rating* Preliminary amount (US$) US$300,000,000 capped floating-rate secured notes due 2020 A 300,000,000 *The rating of the securities is preliminary and subject to change at any time. Profile Expected closing date: Sept. 18, 2015 Final maturity date: Sept. 16, 2020 Issuer: China Car Funding Investment 2015 Collateral: A single corporate loan extended to Geely International (Hong Kong) Ltd., guaranteed by Bank of China Ltd. Transaction administrator: Deutsche Bank AG, Hong Kong Branch Bank account provider: Deutsche Bank AG, Hong Kong Branch Note trustee and security trustee: DB Trustees (Hong Kong) Ltd. Supporting ratings: Bank of China Ltd. as the guarantor to the facility agreement collateralizing this transaction Rationale Standard & Poor's Ratings Services has assigned a preliminary 'A' rating to the US$300 million capped floating-rate secured notes due in 2020 to be issued by China Car Funding Investment The key dependency of the rating is Bank of China Ltd. as the guarantor to the facility agreement collateralizing this transaction. As such, our rating on the notes will be commensurate with the long-term issuer credit rating on Bank of China Ltd. The preliminary rating reflects Standard & Poor's opinion of the likelihood of the full and timely payment of interest on each interest payment date and the ultimate repayment of the principal amount of the note by the legal maturity date. We considered the following factors in our analysis: SEPTEMBER 2,

3 The guarantee is unconditional, irrevocable, and any payment under the guarantee will be made within five Beijing business days after the day of receipt of a demand notice. The guarantee agreement covers the principal and interest payments under the loan and further fees and indemnities as defined under the facility agreement. The coverage will enable the issuer to meet its payment commitment under the notes upon the borrower's default. The guarantee will expire in one year, but can be extended if certain conditions are met. Failure of guarantee extension will cause mandatory prepayment of the loan and the consequent early redemption of the notes. The amount due to noteholders in this early redemption scenario is at least equal to the principal amount outstanding on the notes plus accrued interest, and is covered by the existing guarantee. The timing and amount of payments under the loan and the notes are matched to provide sufficient funding for note payments. If there is any default in the payments of the loan, the guarantor will be responsible for payment of the full principal, interest, and any ancillary costs arising from the loan default. The timeliness of payment on the notes is addressed by the payment sequence of the loan and the notes. The interest and principal payment dates of the loan will be 10 business days before the respective interest and principal payment dates on the notes. In the event that the borrower defaults on the loan payment, there will be sufficient time to claim on the guarantee for the timely payment on the notes. There will be a note expense account with an amount in place that exceeds the committed senior expenses for the term of the transaction's life. Funds in the note expense account will be used for the payment of government fees and all fees, costs, charges, liabilities, and expenses of the transaction parties. Given the simple nature of the structure, we believe the excess amount in the note expense account should help manage the potential risk of any unanticipated increase in costs. Deutsche Bank AG (Hong Kong Branch) acts as the account bank for the issuer's accounts and is responsible for payment distribution. The replacement requirement for account bank is consistent with our criteria to support an 'A' rated security. The transaction employs a simple structure with only one asset to support one class of notes. Consequently, the operational complexity is low. Furthermore, the operational responsibilities are undertaken by Deutsche Bank AG (Hong Kong Branch), which is experienced in such operations. The constitution of the special-purpose entity is consistent with our criteria, including restriction on objects and powers, debt limitations, and separateness from other entities. Transaction Structure The issuer China Car Funding Investment 2015 is a special-purpose bankruptcy-remote vehicle incorporated in the Cayman Islands. The issuer plans to issue a single class of US$300 million capped floating-rate notes in September Pursuant to a loan-purchase agreement, the net proceeds of the notes will be used to purchase all rights from the initial lender, Standard Chartered Bank (Hong Kong) Ltd., under a US$300 million facility agreement, and the associated keepwell deed and demand guarantee. Transaction overview The borrower under the facility agreement is Geely International (Hong Kong) Ltd., a Hong Kong-based company owned by Zhejiang Geely Holding Group Co. Ltd. that is based in the People's Republic of China (PRC). Bank of China Ltd. will guarantee the payment obligations of the borrower under the facility agreement. SEPTEMBER 2,

4 The guarantee on the facility agreement is unconditional and irrevocable, and covers the borrower's payment obligations under the facility agreement, including the full principal, accrued interest, early termination fee, and ancillary expenses and indemnities. With the assignment of the facility agreement and related rights to the issuer, the issuer is also entitled to receive the guarantee payment if the borrower defaults. The guarantee reflects our guarantee criteria, and we view the guarantor as a credit substitute of the borrower's obligation under the facility agreement. We therefore link the notes' rating to our rating on the guarantor. The issued notes and the collateralizing loan are both denominated in U.S. dollars. The issued notes will carry a capped U.S. dollar three-month London interbank offered rate (LIBOR) + margin interest payable every three months (each an interest period) in arrears. The issuer is expected to repay the full principal amount of the notes on the expected maturity date, which is seven business days before the notes' final maturity date. The interest-rate calculation, interest periods, and payment timing of the loan and the notes are matched to ensure sufficient and timely payment on the notes. The performance of the issuer's obligations under the notes will be secured by the grant of a first-ranking security over all of the issuer's assets in favor of the security trustee (for itself on behalf of the note holders and the other secured parties). Throughout the transaction life, a transaction administrator, currently Deutsche Bank AG (Hong Kong Branch), will be responsible for certain services in relation to the payment obligations of the issuer. The transaction structure is illustrated in Chart 1. SEPTEMBER 2,

5 Chart 1 Note Terms And Conditions The notes will carry a U.S. dollar three-month LIBOR + margin interest per annum payable every three months in arrears. If the referenced U.S. dollar three-month LIBOR is higher than 15%, then it will be deemed as 15% (capped U.S. dollar three-month LIBOR). The U.S. dollar three-month LIBOR applicable to an interest period will be decided two London business days before the start of the relevant interest period. The issuer will pay the noteholders an additional amount when the U.S. dollar three-month LIBOR is higher than 15%. This additional amount is a subordinated payment in the waterfall and only payable to the extent of any residual after the collections are used for all payments ranking senior than such additional amount. Our preliminary rating does not address the payment of this subordinated payment to the noteholders. The borrower will be responsible for an additional early termination fee if the loan was prepaid or accelerated. This additional early termination fee will be repaid to the note holders as a premium, and is covered in the demand SEPTEMBER 2,

6 guarantee. Our preliminary rating does not address the payment of this premium to the noteholders. The final payment day of the loan principal will be 10 business days before the legal maturity date of the notes. The issuer is expected to repay the full principal of the notes three business days after the borrower repays the loan. If the borrower fails to pay, then there will be sufficient time to claim under the guarantee to repay the notes by the legal maturity date. A guarantee from Bank of China Ltd. will cover all the borrower's payment obligations under the facility agreement. The guarantee is initially arranged for one year, but can be extended if the guarantee extension conditions are met(see "The guarantee"). Failure to extend the guarantee will trigger a mandatory prepayment of the loan, resulting in early redemption of the notes before the scheduled maturity date. Early redemption of the notes could also arise upon the borrower's voluntary prepayment, or the occurrence of some other mandatory prepayment events or loan acceleration events associated with the default of the guarantor or the borrower. The amount due to noteholders in any of these early redemption events is at least equal to the principal amount outstanding under the notes plus accrued interest, and is covered by the existing guarantee. Rating-Transition Analysis We have adopted a weak-link rating approach in this transaction and equalized the notes' rating to the long-term rating on Bank of China Ltd. Any rating change in Bank of China Ltd. could cause changes in our rating on the notes. Loan Servicing Deutsche Bank AG (Hong Kong Branch) acts as the facility agent in the facility agreement, and will act as the issuer's agent under the facility agreement. The duties of this agent include the collection and monitoring of loan payments, monitoring if the guarantee extension conditions are met, and the submission of a guarantee payment demand notice to the guarantor if the borrower defaults. The facility agent will receive the loan or guarantee collections before immediately transferring the money to the issuer's account. The intraday commingling risk is mitigated by minimum eligible rating and replacement arrangement under facility agreement. Asset Characteristics And Credit Analysis The transaction has a single loan as the collateralized asset that provides cash flow for notes payment. The demand guarantee on the loan provides the credit support. With the loan borrower carrying no rating by Standard & Poor's, we link the transaction's rating to our rating on the guarantee provider. The loan The initial lender agrees to lend US$300 million to the borrower through the facility agreement made in September The borrower will draw down the full committed amount in September 2015, and needs to repay the loan in full SEPTEMBER 2,

7 on the day falling 10 business days before the loan maturity date, which is Sept. 16, The borrower shall pay interest every three months, except for the first interest period, on the day falling 10 business days before the last day of each interest period. Despite this earlier payment, the interest payable on each payment date will remain the full interest for the whole three-month interest period. Likewise, the borrower agrees that for the purposes of calculating interest payable for the interest period ending on the loan maturity date, the total outstanding amount of the loan shall be deemed to have been outstanding for the entire interest period. Voluntary prepayment under the loan agreement is allowed. In addition, the loan agreement includes some mandatory prepayment and borrower's default-triggered acceleration. Under such events, the borrower will need to pay an additional early termination fees to the lender, in addition to the principal and accrued interest on the loan. There is no further lending obligation on the lender because the amount under the facility agreement has been drawn, and the borrower cannot re-borrow any part of the facility it has repaid. The guarantee Bank of China Ltd. will issue a demand guarantee to the initial lender, Standard Chartered Bank (Hong Kong) Ltd., for its US$300 million loan to the borrower. The beneficiary of this guarantee is the loan security agent, Standard Chartered Bank (Hong Kong) Ltd. Bank of China Ltd. is the third-largest commercial bank in China in terms of asset size. The PRC government owns a 67.72% stake in the bank and holds a controlling right in the bank's operation. The following is a summary of the important clauses under the demand guarantee: The guarantee is unconditional and irrevocable. The guarantor irrevocably undertakes to pay to the beneficiary under the guarantee and in its capacity as security agent under the facility agreement any principal, interest, early termination fee, and any other fees and amounts due and payable by the borrower under the facility agreement up to a maximum of US$330,000,000. In other words, the guarantee will cover not only the loan principal and interest, but also all ancillary costs due to the borrower's failure to pay under the facility agreement up to the maximum amount. The guarantor will make the payment within five Beijing business days after the day of receipt of the demand notice by authenticated SWIFT. The corresponding transaction arrangement ensures such guarantee payment arrangement will not affect the notes' timely interest payment. The guarantee payment is free of deduction (for tax) or set-off. If the payment is subject to deduction or withholding tax, the guarantor will gross it up. The demanding party that makes the claim for guarantee payment will be the facility agent, or the security agent as the beneficiary, if the facility agent cannot do its job. The guarantor represents that all authorization and approvals needed for entering into the guarantee and performing its obligations have been obtained, and it represents to continue compliance with all applicable laws and regulations of the PRC. The guarantee shall expire one year after deal closing, but can be extended for a specific timeframe before the expiry date if the guarantor duly issues an extension letter on the existing guarantee and a certified legal firm issues a legal opinion addressing the enforceability of the extended guarantee (the "guarantee extension conditions"). If guarantee extension conditions cannot be satisfied 23 days before the expiry of the existing guarantee, then the facility agent will notify the borrower for mandatory prepayment. The amount due in a mandatory prepayment SEPTEMBER 2,

8 scenario is covered by the existing guarantee. The PRC-law legal opinion indicates the guarantee obligations are at least pari passu in priority of payment with all the guarantor's other outstanding unsecured and unsubordinated obligations and liabilities under PRC's insolvency law. The beneficiary of the guarantee will not be transferred from the security agent to the issuer after the loan purchase. Instead, the facility agreement and the other transaction document states that the security agent will act as the beneficiary of the guarantee on behalf of the lender, which is the issuer after the loan purchase. According to the transaction arrangement, the security agent will have no access to the guarantee payment, and will be replaced if it becomes insolvent or it is illegal for it to continue the role. We believe this arrangement should not introduce further legal or counterparty risk to our analyses due to the pure agency role and limited operation of the security agent. The guarantor commits a maximum of US$330 million, or 110% of the loan (notes) principal amount, for the guarantee payment to the lender. The guarantor will remain liable for any tax liability relating to the guarantee payment. This tax payment gross-up commitment is in addition to the aforementioned US$330 million cap. If the loan defaults and the owed money is higher than US$330 million, then the guarantor will not be responsible for the additional amount. The cap on the guarantee may introduce risk that the guarantee payment might be insufficient to repay the notes fully because there are senior expenses that rank for payment ahead of the notes. For this, Standard & Poor's has evaluated the cash-flow buffer under stress conditions, the payment waterfall of the transaction, and the senior expenses related to the guarantee payment. We believe the risk of having an insufficient guarantee payment to fully repay the notes due to the guarantee cap is a rating remote event. The keepwell deed The borrower's parent company--the keepwell provider--will provide a keepwell deed for the benefit of the loan lender upon the execution of the facility agreement. The document describes a general support from the keepwell provider to the borrower to meet its payment obligations under the facility agreement. This document reflects the intention of the keepwell provider to provide support to the borrower if necessary. Standard & Poor's does not consider this as a credit substitute of the borrower because the deed is not irrevocable, nor an unconditional guarantee for the borrower's payment obligations. We therefore have not given any credit to the keepwell deed in our rating of the notes. Analytical Contacts Primary analyst: Luke Elder, director, Melbourne, (61) Secondary contact: Andrea Lin, associate director, Taipei, (886) Surveillance analyst: Justin Rockman, associate, Melbourne (61) SEPTEMBER 2,

9 Related Criteria And Research Related Criteria Global Framework For Assessing Operational Risk In Structured Finance Transactions, Oct. 9, 2014 Global Framework For Cash Flow Analysis Of Structured Finance Securities, Oct. 9, 2014 Counterparty Risk Framework Methodology And Assumptions, June 25, 2013 Guarantee Criteria--Structured Finance, May 7, 2013 Asset Isolation And Special-Purpose Entity Criteria--Structured Finance, May 7, 2013 Understanding Standard & Poor's Rating Definitions, June 3, 2009 Structured Finance Criteria Introduced for Cayman Islands Special-Purpose Entities, July 18, 2002 Related Research Global Structured Finance Scenario And Sensitivity Analysis: Understanding The Effects Of Macroeconomic Factors On Credit Quality, July 2, 2014 Assessing Credit Quality By The Weakest Link, Feb. 13, 2012 The issuer has not informed Standard & Poor's (Australia) Pty Limited whether the issuer is publically disclosing all relevant information about the structured finance instruments that are subject to this rating report or whether relevant information remains non-public. Standard & Poor's (Australia) Pty. Ltd. holds Australian financial services licence number under the Corporations Act Standard & Poor's credit ratings and related research are not intended for and must not be distributed to any person in Australia other than a wholesale client (as defined in Chapter 7 of the Corporations Act). SEPTEMBER 2,

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