Fitch Ratings has affirmed CSSC (Hong Kong) Shipping Company Limited's (CSSC HK Shipping) Long-Term Issuer Default Rating (IDR) and the rating on the senior unsecured note issued by CSSC Capital 2015 Limited at ‘A’. The Outlook is Stable.
 

CSSC HK Shipping was established in 2012 in Hong Kong as a ship-leasing subsidiary of China State Shipbuilding Corporation (CSSC). China Shipbuilding Group Corporation (CSG) fully acquired CSSC and China Shipbuilding Industry Company (CSIC) in October 2021 from the State-owned Assets Supervision and Administration Commission of the State Council. This makes CSG the world's largest shipbuilding conglomerate and means CSG now is the ultimate parent of CSSC HK Shipping and controls 75% of CSSC HK Shipping's stake through CSSC.
 

KEY RATING DRIVERS
 

CSSC HK Shipping's rating reflects Fitch's expectation of strong institutional support from CSG, whose credit profile is based on support from the China sovereign (A+/Stable).

Fitch has shifted the anchor for its support assessment of CSSC HK Shipping to CSG from CSSC, following the new shareholding structure, but believes CSSC HK Shipping's strategic importance within the combined group remains unchanged.
 

CSSC HK Shipping is the group's leasing subsidiary and acts as one of the key sales units for ships built by the greater group. It also provides financing solutions to group clients.

CSSC HK Shipping's fleet-rental business has been particularly important in sustaining the group's core shipbuilding business during industry downturns, while its investment in new types of ships demonstrates the group's shipbuilding capabilities to global clients.
 

Fitch believes the consolidation of CSSC and CSIC and the alignment of the shareholding structure, which is ultimately controlled by the Chinese government, has not changed CSSC HK's strategic role and the level of integration of its management and operation with the wider group. Funding access has also benefited from the perceived parental support, which we expect to continue.
 

CSSC HK Shipping's standalone credit profile is notably lower than its IDR due to a moderate company franchise, monoline business model, and short operating history. The company's debt/tangible equity ratio has been below 3.0x since 2019 (1H21: 2.4x), which is lower than that of other Chinese leasing peers.
 

The Stable Outlook reflects Fitch's expectation that CSSC HK Shipping's strategically important role and close integration with CSG will not change meaningfully. The Outlook is consistent with Fitch's view on the credit profile of CSG and the Chinese sovereign rating and reflects the agency's view that the relationship between CSG and the China sovereign will remain unchanged.
 

SENIOR UNSECURED DEBT
 

CSSC Capital 2015 is CSSC HK Shipping's wholly owned offshore special-purpose vehicle registered in the British Virgin Islands. The rating on the senior unsecured notes issued by CSSC Capital 2015 is in line with CSSC HK Shipping's IDR, as the notes are unconditionally and irrevocably guaranteed by CSSC HK Shipping and at all times rank pari passu with all of CSSC HK Shipping's other direct, unsubordinated, unconditional and unsecured obligations.
 

RATING SENSITIVITIES
 

Factors that could, individually or collectively, lead to negative rating action/downgrade:
 

CSSC HK Shipping's IDR would be downgraded upon any signs of weakening in its linkage with CSG. This could arise from significant ownership dilution, a reduction in its strategic role in the group – as evidenced by a notable expansion in other leasing businesses that are not linked to the parent's core business – and its size relative to CSG.
 

Any negative change in Fitch's internal view on CSG's credit profile, which could reflect a shift in the perceived willingness or ability of the China sovereign to support CSG in a full and timely manner, could lead to negative rating action. A downgrade of China's sovereign rating would affect CSSC HK Shipping's ratings by the same magnitude.
 

The rating on the notes is equalised with CSSC HK Shipping's IDR, and will move in tandem with any change to CSSC HK Shipping's rating. The note ratings could also be downgraded if there is a significant adverse change in China's capital-account regulations that restrain CSG from providing timely cross-border support for CSSC HK Shipping to service its debt obligations.
 

Factors that could, individually or collectively, lead to positive rating action/upgrade:
 

CSSC HK Shipping's IDR could be upgraded if its linkage with CSG strengthens, such that the company becomes exclusively captive and a wholly owned subsidiary or if there is any positive change in Fitch's view on CSG and, ultimately, China's sovereign rating.
 

The rating on the notes is equalised with CSSC HK Shipping's IDR and will be upgraded if CSSC HK Shipping is upgraded.
 

BEST/WORST CASE RATING SCENARIO
 

International scale credit ratings of Financial Institutions and Covered Bond issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from ‘AAA’ to ‘D’. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
 

The principal sources of information used in the analysis are described in the Applicable Criteria.
 

PUBLIC RATINGS WITH CREDIT LINKAGE TO OTHER RATINGS
 

CSSC HK Shipping's rating is supported by Fitch's internal credit view of CSG.
 

ESG CONSIDERATIONS
 

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