China State-Owned Trader’s Sharp Downgrade to Have Ripple Effect

(Bloomberg) -- A drastic rating cut on a Chinese state-owned commodities trader to reflect reduced government support could ripple through its peers and hurt their appeal, according to credit analysts.


Fitch Ratings downgraded Tewoo Group Co.’s credit score by a rare six steps on Monday, after reassessing the support track record of its parent, the Tianjin municipality, to Tewoo as ‘Moderate’ rather than ‘Strong.’ It also lowered Tewoo’s standalone credit profile to ccc+, a rating that signals deep financial stress.


Fitch’s move sent Tewoo’s bond prices reeling to a record low. And that has hurt market sentiment toward state-owned enterprises with weak standalone fundamentals and less strategic importance, according to Nomura Holdings Inc.


“If a default of Tewoo really happens, it would shake the perception on some of these SOEs and could have contagious impact toward the local government financing vehicle space, especially the weak ones,” said Tony Chen, Hong Kong-based credit desk analyst at Nomura.


Below are analyst views on market impact from Fitch’s downgrade on Tewoo:


Owen Gallimore, head of credit strategy at ANZ
* There have already been four fallen angels among China offshore borrower in 2019 and a high percentage of credits with “generously rated” BBB rating within the LGFV sector.
* "China’s high-yield sector and local SOEs are increasingly risky investments in our view, with the transmission of liquidity clearly not proving strong to non-central SOEs."

Sandra Chow, head of Asia at CreditSights in Singapore
* While there’s no evidence that the local government will walk away from Tewoo yet, the Fitch report is pointing that the tides are turning and it’s shaking investors’ confidence in the company.
* Investors have been counting on local government support given Tewoo’s size and importance for the local economy, but they will be more cautious going forward given Fitch’s reassessment of the strength of this support and the lack of public information available on the company’s situation.
* It could also make investors more wary of LGFVs again now.

Charles Macgregor, head of Asia at Lucror Analytics
* The Tianjin government’s financial position has been deteriorating for a number of years, partly due to property speculation curbs cooling the city’s real estate market.
* The commodity trader appears to have poor risk management systems and, like Noble, will quickly lose access to market liquidity if it has problems.

2019-04-30 05:55:54.663 GMT

By Carrie Hong and Annie Lee