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Fitch Assigns Lionbridge Capital First-Time Rating of 'B+'; Outlook Stable
July 7, 2017 / 6:36 AM / 2 months ago

Fitch Assigns Lionbridge Capital First-Time Rating of 'B+'; Outlook Stable

(The following statement was released by the rating agency) TAIPEI, July 07 (Fitch) Fitch Ratings has assigned Lionbridge Capital Co., Limited a Long-Term Issuer Default Rating (IDR) of 'B+'. The Outlook is Stable. Fitch has also assigned the proposed senior unsecured notes to be issued by New Lion Bridge Co., Ltd. an expected rating of 'B(EXP)' with a Recovery Rating of 'RR5'. New Lion Bridge is a special-purpose vehicle (SPV) set up to issue the offshore notes on behalf of Lionbridge Capital. The final rating on the proposed notes is contingent on the receipt of final documents conforming to information already received. Lionbridge Capital is an investment holding company incorporated in Hong Kong in 2011. Bain Capital is the company's largest shareholder, with an 80% stake, followed by Wisin Capital with 20%. Lionbridge Capital's wholly owned subsidiary, Lionbridge China, which was incorporated in 2012 and headquartered in Beijing, is the main operating subsidiary and accounted for around 97% of the group's assets. Lionbridge China provides truck leasing and equipment finance in China. Receivables from truck leasing and financing for medical, manufacturing and agricultural equipment accounted for 42% and 49% of total lease receivables, respectively. Lionbridge Capital had total assets of around CNY9.5 billion at end-2016 (including Lionbridge China's CNY9.2 billion). KEY RATING DRIVERS IDR Lionbridge Capital's 'B+' IDR reflects the group's credit profile on a consolidated basis, given the high integration between Lionbridge Capital and Lionbridge China and limited capital control restrictions on funds flowing between the two companies as Lionbridge China is a foreign-funded leasing company. The rating reflects the company's short operating history, high reliance on wholesale funding, weak profitability and higher leverage than other leasing companies rated by Fitch. The ratings also take into account its focus on the niche truck leasing market, its franchise within the sector, as well as the limited maturity gap between its receivables and debt, and cash flow generation of its leased assets. Lionbridge Capital has been fine-tuning its business strategy over its short operating history. The company shifted its focus from equipment finance to the niche truck leasing sector, particularly to retail customers who are mainly freelance truck drivers working in the shipping and logistics industry. The credit profile of retail customers is traditionally weaker than that of corporate or institutional customers, but in this case, the drivers' repayment ability is supported by robust demand for their services, which is driven by the rapid growth of logistics support for the booming online shopping industry. The company has not yet experienced an economic downturn, so the sustainability of its business model is yet to be tested. Receivables also benefit from a liquid secondary market for trucks, which supports the recovery process in case of lease defaults, with the recovery rate averaging 85%. In addition, the average term for Lionbridge Capital's truck lease is about two years, which underpins cash flow compared with other leasing companies. As with other leasing companies, Lionbridge Capital is highly reliant on wholesale funding, which is more sensitive to market conditions. In addition, the company has high levels of encumbered assets and secured debt, which limits the flexibility of its funding and liquidity profile and may reduce resources available to make payments on its unsecured debt. The issuer has sought to diversify its sources of funding and access the Chinese domestic bond market, including issuing asset-backed securities (ABS) in China and a five-year yuan-denominated bond listed on the Shanghai Exchange in 2016. Lionbridge Capital's total assets increased at CAGR of around 60% over 2014-2016, outpacing the increase in internal capital generation. As a result, the company's leverage, measured by its debt-to-tangible common equity ratio, rose to 5x at end-2016, which is higher than that of most of its Fitch-rated peers. The company's profitability is also low due to high operating costs. We expect the company's leverage to remain high given its expected asset growth and modest profitability. Profitability is unlikely to improve significantly, even though the company has shifted towards higher-yielding truck leasing, because we expect tighter market liquidity conditions in China in 2017. This may raise funding costs and we do not expect the company's cost structure to improve substantially in the short term. Fitch assesses the company's management quality, credit risk systems and risk control measures as adequate. However, the management quality and stability, the efficiency of its underwriting and risk control systems and the sustainability of its financial profile have yet to be proven in an economic downturn. Senior Notes and Recovery Rating The proposed senior unsecured notes issued by New Lion Bridge are guaranteed by Lionbridge Capital and constitute general, unsecured and unsubordinated obligations of Lionbridge Capital. The proceeds will be used to refinance existing debt, supplement working capital and for other general corporate purposes. The notes will rank pari passu with Lionbridge Capital's other unsecured and unsubordinated obligations, and be subordinated to secured debt of Lionbridge Capital and all debt obligations of Lionbridge China. The issuer also has options to redeem and repurchase notes. If there is a change of control event, where Bain Capital's shareholding in Lionbridge Capital drops to below a certain level and the bond rating is downgraded, the issuer or the guarantor will be required to offer to purchase all the outstanding notes above the face value. The notes are rated one notch below the company's Long-Term IDR, with a Recovery Rating of 'RR5', which reflects the below-average recovery prospects. This is because the debt issued by New Lion Bridge is structurally subordinated to the debt of Lionbridge China and recovery of Lionbridge Capital's equity investment in Lionbridge China will be limited in the event of liquidation as all the operating assets are on Lionbridge China's books. RATING SENSITIVITIES IDR, Senior Notes and Recovery Rating Positive rating action may arise if Lionbridge Capital can demonstrate the sustainability of its business model and financial profile through business cycles, as well as its ability to consolidate its franchise in the niche truck leasing market. Improvement in the company's funding and liquidity profile, including securing a stable funding pool, strengthening its liquidity reserve and further closing the maturity gap between its lease receivables and debt could result in a rating upgrade. Negative rating actions may result if the company's liquidity and funding profile and cash flow deteriorate to the extent that the negative maturity gap between its lease receivables and debt widen significantly. A substantial shift in its business model, increased risk appetite or a severe capital market dislocation that disrupts the company's funding could lead to a downgrade. The rating on the notes is sensitive to the same factors that drive Lionbridge Capital's IDR as it is the guarantor. In addition, the ratings on the notes would be sensitive to changes in the Recovery Rating, which depends on the size of the issuance relative to the guarantor's unencumbered assets and the underlying quality of these assets. The note rating will also depend on how Lionbridge Capital downstreams the proceeds to Lionbridge China. Any change in the mix of debt and shareholder loans at Lionbridge China that is materially different from our expectations and that reduces the recovery rate significantly will cause a rating downgrade. Contact: Primary Analyst Katie Chen Director +886 2 8175 7614 Fitch Australia Pty Ltd, Taiwan Branch Suite 1306, 13/F 205 Tun Hwa North Road Taipei 105, Taiwan Secondary Analyst Shirley Hsu Associate Director +886 2 81757606 Committee Chairperson Mark Young Managing Director +65 6796 7229 Date of Relevant Rating Committee: 30 June 2017 and 6 July 2017 Media Relations: Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: wailun.wan@fitchratings.com. Additional information is available on www.fitchratings.com Applicable Criteria Global Non-Bank Financial Institutions Rating Criteria (pub. 10 Mar 2017) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here Solicitation Status here#solicitation Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. 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