China Jinmao Holdings# Guaranteed Subordinated Perpetual Securities Rated #BB# With Intermediate Equity Content

Stocks and Financial Services Press Releases Monday October 30, 2017 17:33
HONG KONG--30 Oct--S&P Global Ratings

HONG KONG (S&P Global Ratings) Oct. 30, 2017--S&P Global Ratings today assigned its 'BB' long-term issue rating to proposed U.S. dollar-denominated subordinated perpetual securities that Franshion Brilliant Ltd. will issue. China Jinmao Holdings Group Ltd. (BBB-/Stable/--) guarantees the securities. We also view the issue to have intermediate equity content. We will treat 50% of the principal of the securities as debt and 50% of the distributions as interest. The rating is subject to our review of final issuance documentation.

China Jinmao intends to use the proceeds for refinancing bank loans due in 2018 and other general corporate purposes. The ratings on China Jinmao and its outstanding senior notes are not affected as we expect the company's leverage will remain under control.

The securities will rank subordinated to other unsecured and unsubordinated obligations of China Jinmao. Distributions are optionally deferrable at the issuer's discretion. We rate the securities two notches below China Jinmao's 'BBB-' issuer credit rating, reflecting the subordinated status and optional deferability.

The securities will pay a fixed distribution rate until the first reset date in the sixth year. The distribution rate will be reset in 2023 based on the prevailing U.S. five-year Treasury rate plus an initial credit spread. The credit spread above the Treasury rate will step up by 25 basis points on the second reset date in 2028 and by an additional 75 basis points in 2043. Therefore, we expect the intermediate equity content to remain until 2023, or earlier, should we reassess management's intent as no longer supportive.

While the issue does not have a legally binding replacement provision, we believe management intends to replace the perpetual securities with similar equity-like instruments. We view China Jinmao's ongoing issuance of new hybrids as a sign of management's commitment to maintain hybrid capital as a permanent feature of the company's capital structure. We could lower our assessment of the equity content on the proposed securities to minimal if the company indicates any deviation from its replacement intention. A minimal equity content means we would treat the full principal of the securities as debt and all the distributions as interest expenses.


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