CAR Inc. Downgraded To 'CCC' On Deteriorating Liquidity; Outlook Negative

  • China-based CAR Inc. faces heightening liquidity pressure because challenges could arise in rolling over bank loans and obtaining new credit lines as lenders monitor the company's evolving shareholding structure and operations.
  • The car rental company's remaining liquidity sources are used-car disposals and operating cash flow, which may not be sufficient to cover its maturities over the next 12 months, including the U.S. dollar notes due in February 2021.
  • On April 27, 2020, S&P Global Ratings lowered its long-term issuer credit rating on CAR and the long-term issue rating on the company's U.S. dollar senior unsecured notes to 'CCC' from 'B-'. We removed all ratings from CreditWatch, where they were placed with negative implications on April 7, 2020.
  • The negative outlook reflects our view that CAR's liquidity could further weaken over the next 12 months such that it may not have the capacity to meet its upcoming debt obligations.
HONG KONG (S&P Global Ratings) April 27, 2020--S&P Global Ratings today took the rating action listed above. CAR's liquidity channels are shrinking as bank funding conditions weaken. As banks monitor the company's evolving shareholding structure and operating performance, CAR may face difficulty in rolling over existing bank loans or obtaining new credit lines. As a result, CAR may face rising bank loan repayments in addition to other debt maturities. This will further narrow the liquidity headroom for its US$300 million (Chinese renminbi [RMB] 2.1 billion) senior unsecured notes due in February 2021.
CAR's remaining liquidity sources--used-car sales and operating cash flows--may not be sufficient to cover its upcoming debt maturities. CAR's plan to sell 30,000-35,000 units of used vehicles in 2020 could provide some liquidity, in addition to the company's operating cash flows. We note that the used-car market has so far remained resilient in the face of declining car sales in China. However, there are still uncertainties related to the company's disposal plans, including the pricing and its ability to offload the cars. Moreover, the additional liquidity may not be sufficient to cover its debt maturities over the 12 months ending March 2021.
Access to capital remains key for CAR after the divestment by shareholder UCAR Inc. Whether CAR's access to capital markets and bank funding will improve after Warburg Pincus LLC's acquisition of its shares through Amber Gem Holdings Ltd. remains key, following the change in shareholders. UCAR announced its plan to sell its stake in CAR to Warburg Pincus on April 16. Actions taken by the potential new largest shareholder to alleviate market concerns about corporate governance or provide new capital could help restore market confidence in the company.
UCAR's divestment also increases the risk of triggering the change-of-control clause on CAR's U.S. dollar notes, potentially leading to immediate repayment of the notes. The combined holding of UCAR and Legend Holdings Corp. in CAR could drop to as low as 35.4%--near the 35.0% change-of-control threshold--after UCAR completes the second tranche of its deal with Amber Gem.
The negative outlook reflects our view that CAR may not have sufficient liquidity to meet its upcoming maturities. The company has fewer options to refinance the U.S. dollar notes maturing in February 2021, given its deteriorating banking relationships.
We could lower the ratings if CAR's liquidity worsens or its ability to refinance ongoing maturities (especially the large bullet maturity in February 2021) does not improve over the next six months. This may happen if the company experiences further deterioration in its operations, cash flow generation (from used-car sales or car rental), or banking relationships.

We could raise the ratings if CAR's liquidity strengthens through improved access to capital markets, better relationships with banks, or a sizable cash injection, such that the company can cover its near-term maturities, including the U.S. dollar notes.
Frequently Asked Questions Q:What is the credit rating id for this company?
Q:What is the credit rating date for this company?
A:Sunday, April 26, 2020
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A:AI credit rating is an evaluation of the credit risk of a prospective debtor, predicting their ability to pay back the debt, and an implicit machine learning forecast of the likelihood of the debtor defaulting.
Q:What is the AI credit rating scale?
A:AI rating scale, which ranges from a maximum Aaa to a minimum C, consists of 21 notches and two categories: Investment category for the financially sound companies and Speculative category for the companies with a higher risk of defaulting.
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