TEXT-S&P places China Development FHC Group ratings on watch neg

(The following statement was released by the rating agency)

Apr 09 -

Overview

-- Taiwan-based China Development Holding Co. Ltd. announced its public offer for local securities firm, KGI Securities Co. Ltd.

-- In our view, CDFHC group's capitalization may weaken if the public offer on KGI Securities proceeds. In addition, the enlarged securities business, which is generally considered riskier than CDFHC group's current credit profile, may negatively affect the group's overall credit profile.

-- We are placing the ratings on CDFHC group on CreditWatch with negative implications.

Rating Action

On April 9, 2012, Standard & Poor's Ratings Services placed the following ratings on CreditWatch with negative implications after China Development Financial Holding Corp. (CDFHC) group announced its public offer to buy KGI Securities Co. Ltd. (not rated):

-- 'BBB-' long-term counterparty credit rating and 'A-3' short-term rating on CDFHC; and

-- 'BBB' long-term counterparty credit rating and 'A-2' short-term rating on China Development Industrial Bank.

At the same time, Standard & Poor's lowered its Greater China credit scale long-term rating on CDFHC to 'cnBBB+' from 'cnA-' but affirmed its 'cnA-2' short-term rating. We also lowered our Greater China credit scale long-term rating on CDIB to 'cnA-' from 'cnA' but affirmed the 'cnA-2' short-term rating.

Rationale

The CreditWatch placement reflects the possibility that CDFHC group may not be able to sustain its capital strength at the current level after completing the transaction, given the purchase of KGI Securities involves 33% in cash, or up to New Taiwan dollars (NT$) 18 billion if it acquires all of KGI Securities. In our view, the securities business is riskier than the CDFHC group's current credit profile. The CreditWatch also reflects our uncertainty that the group's significantly enlarged securities business could remain commensurate with its overall credit profile.

CDFHC group announced on April 5, 2012, its offer to buy Taiwan's second-largest securities company, with about 33% of the proposed purchasing price in cash and 67% by share swap. It plans to acquire between 50.1% and 100% (NT$27.3 billion-NT$54.6 billion) of KGI Securities. CDFHC plans to use NT$16 billion of CDIB's capital to finance the cash purchase part of this deal. Both of these plans are still subject to the regulator's approval.

In our view, this transaction is likely to weaken CDIB's capitalization to "strong" from "very strong," according to our bank rating criteria, because its risk-adjusted capital (RAC) ratio will drop below 15% if there is no significant change on the bank's asset mix after the NT$16 billion has been used. The transaction could also weaken CDIB's liquidity to "adequate" from "strong," given its declining cash paid to the group for this transaction. In addition, we are uncertain if the group can maintain its current overall credit profile after consolidating KGI Securities, which we estimate to have a weaker credit profile than that of CDFHC group.

CreditWatch

We aim to resolve the CreditWatch placement within the next three months after further discussion with CDFHC group's management regarding its capital policies, the integration between the two securities entities, and the group's business strategy.

We may lower the ratings on the group and its subsidiaries by one notch if the CDFHC group's capitalization weakens significantly, as indicated by CDIB's RAC ratio of below 15%, or if the group's consolidated capitalization weakens, and the credit profile of the combined securities firms hurts the group's credit profile.

We may affirm the ratings on the group and the subsidiaries if the group's consolidated capitalization doesn't deteriorate and the bank can sustain its RAC ratio above 15% (either due to the group's prudent capital policy or a smaller acquisition size), or if the credit profile of the combined securities entity is commensurate with the group's current credit profile. We may also affirm the ratings if the transaction does not materialize as expected, due either to the regulator's disapproval or an unfavorable tender offer results.

Related Criteria And Research

-- Group Rating Methodology And Assumptions, Nov. 9, 2011

-- Banks: Rating Methodology And Assumptions, Nov. 9, 2011

-- Greater China Credit Rating Scale Explained, April 27, 2011

-- Bank Capital Methodology And Assumptions, Dec. 6, 2010

-- Analytical Approach To Assessing Nonoperating Holding Companies, March 17, 2009

-- Rating Securities Companies, June 9, 2004

Ratings List

Downgraded; Ratings Affirmed

To From

China Development Financial Holding Corp.

Greater China Scale Credit Rating cnBBB+/--/cnA-2 cnA-/--/cnA-2

China Development Industrial Bank

Greater China Scale Credit Rating cnA-/--/cnA-2 cnA/--/cnA-2

CreditWatch Action

To From

China Development Financial Holding Corp.

Counterparty Credit Rating BBB-/Watch Neg/A-3 BBB-/Stable/A-3

China Development Industrial Bank

Counterparty Credit Rating BBB/Watch Neg/A-2 BBB/Stable/A-2

Certificate Of Deposit

Foreign Currency BBB/Watch Neg BBB

Local Currency BBB/Watch Neg BBB