Moody's downgraded the long- and short-term issuer ratings of Zhongyuan Asset Management Co. Ltd. to Ba1/NP from Baa3/P-3 and revised the entity-level outlook to stable from negative.
The rating agency said Aug. 14 that it also downgraded the company's baseline credit assessment to "b2" from "b1" and assigned the company a Ba1 corporate family rating.
The ratings action comes after the Communist Party of China's commission for discipline inspection in Henan province said former Zhongyuan Asset Management CEO Yue Shengli was under investigation for suspected violation of laws.
Moody's said the alleged misconduct of the company's former executive suggests a material weakness in its corporate governance. The change in the company's auditor for its 2019 report also raises concerns over the quality of its financial reporting and internal controls, the rating agency added.
In addition to weak corporate governance, the company's "b2" baseline credit assessment reflects the asset manager's short track record, high leverage, weak profitability and high earnings volatility, as well as abundant funding sources and liquidity.
The company's corporate family rating incorporates a four-notch uplift based on the expectation of a high level of support from and a high level of dependence on the Chinese government in times of need.
Meanwhile, the outlook revision reflects the view that the high level of government support will help Zhongyuan Asset Management maintain its financial profile at the current level and limit the negative impact from the ex-CEO's misconduct, the rating agency said.