Goldman: Here’s Which Credits Are At Risk From Moody’s China Downgrade

So obviously China isn’t loving the Moody’s downgrade, which the Ministry Of Finance hilariously called “absolutely groundless” overnight.

But “groundless” or not, it happened and while Beijing can contain the damage in certain markets by simply intervening, that’s not the case everywhere.

One place you should expect to see an impact is SOEs which benefit from a quasi-Party guarantee – a guarantee that just got downgraded.

Here’s Goldman’s snap take…

Via Goldman

Earlier today Moody’s downgraded China’s sovereign rating to A1 (stable outlook) from Aa3 (negative outlook), with the negative outlook on the previous Aa3 rating initiated in March 2016. Note that the current S&P rating for China sovereign is AA- (negative outlook), with that rating also put on negative outlook in March 2016. According to Moody’s, the rationale for the downgrade is the expectation that economy-wide leverage will increase further over the coming years, as the planned reform program is likely to slow, but not prevent, the rise in leverage. And the stable outlook reflects their view that the risks are balanced, noting that the country’s largely closed capital account and government control over parts of the financial system help to reduce financial instability, aided by large household savings and ample foreign currency reserves.

Credits with top-down support will be impacted – in our view, the credits that will be impacted by the downgrade are credits whose ratings are assessed more from a top-down approach, i.e. credits where substantial support from central government is implied and with that support being the key driver for their credit ratings.

  1. Financial institutions are certainly in that category, given the systemic importance of that sector. When Moody’s changed the country’s outlook to negative in March 2016, they also changed the rating outlook for 33 financial institutions (these included 3 policy banks, 12 domestic commercial banks, 3 distressed asset management companies, 3 financial leasing companies, 3 securities firms, 1 asset manager and 8 insurance companies).
  2. The three large state-related oil companies’ Aa3 ratings were put on review for downgrade by Moody’s in February 2016 (due to a rating methodology change), and the three ratings were affirmed at the end of March 2016 with outlooks moved to negative, which was reflective of the negative outlook on the sovereign rating; therefore we think ratings on these three companies could be affected.
  3. Large state-owned enterprises (SOEs) whose credit ratings incorporate substantial government support and whose ratings closely align with sovereign credit strength are also likely to be impacted. In March 2016, Moody’s changed the rating outlook to negative on 38 SOEs and rated subsidiaries following the outlook change for the sovereign.

Screening for Baa3 rated bonds – Exhibits 1 and 2 are screens of financial institutions and corporate credits that are rated Baa3 by Moody’s. Exhibit 1 shows that a number of bank tier 2 debt are rated Baa3 with negative outlook.

ChinaDebt

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