HONG KONG Sept. 18, 2020--S&P Global Ratings today assigned its 'BBB+' long-term issue rating to the Tier-2 dated capital bonds that China Development Bank Financial Leasing Co. Ltd. (CDBFL: A/Stable/A-1) proposes to issue. The bonds have a tenor of 10 years with a call option at the end of the fifth year. The issue ratings are subject to our review of the final issuance documentation.
The rating on the bonds is two notches lower than the issuer credit rating on CDBFL. We made a one notch downward adjustment for subordination and one notch for the issue's principal write-down feature.
In our view, CDBFL is a highly strategic subsidiary of China Development Bank (CDB: A+/Stable/A-1). We expect any potential extraordinary support to the parent to indirectly flow to CDBFL, should it be needed. CDB is a government-related entity for which we see an almost certain likelihood of extraordinary support from the government of China in case of distress.
We believe that the government is very likely to take preemptive measures to prevent activation of a nonpayment of interest trigger on the CDBFL bonds. The starting point of the notching down is therefore the issuer credit rating on CDBFL. We note that interest payment is subject to the prevailing regulatory requirements and shall be made from CDBFL's available resources. We do not view the interest payment terms as a deferral feature because interest nonpayment may lead to a winding up of the issuer. We therefore do not any apply notching adjustment on this instrument for the risk of interest nonpayment.
In our opinion, the bonds can absorb losses only on a nonviability basis. We therefore assess the bonds as having no equity content and exclude them in our calculation of CDBFL's adjusted capital.
CDBFL will use the net proceeds of the bonds to boost its Tier-2 capital in accordance with applicable laws and for the purposes approved by regulatory authorities.