eHi Car Services Ltd. #BB# Rating Placed On CreditWatch Negative On Risks Emerging From Privatization

Stocks and Financial Services Press Releases Tuesday April 17, 2018 17:42
HONG KONG--17 Apr--S&P Global Ratings

HONG KONG (S&P Global Ratings) April 17, 2018--S&P Global Ratings placed its 'BB' long-term issuer credit rating on eHi Car Services Ltd. on CreditWatch with negative implications. We also placed our 'BB' long-term issue rating on the company's outstanding U.S. dollar-denominated senior unsecured notes on CreditWatch with negative implications. China-based eHi is a car rental and car services provider.

Our CreditWatch placement reflects the possibility that eHi's debt leverage and financial policy could become more aggressive following its privatization. The company may also face some refinancing risk if the proposed transaction structure is altered in a meaningful way.

On April 6, 2018, eHi announced that it had entered into a merger agreement with a holding company fully owned by a consortium of (potential) new shareholders and certain existing shareholders. The consortium has offered to acquire the remaining stake in eHi at US$6.75 per common share (or US$13.5 per American Depository Share). The existing shareholders in the consortium control 29.6% of eHi's common shares and have 37.5% of the voting power. The consortium will fund the transaction through a debt and equity commitment. The transaction is scheduled to be closed by the third quarter of 2018, but is still subject to approvals by the U.S. Securities and Exchange Commission, eHi's shareholders, and the company's offshore noteholders.

We expect eHi's privatization plan to result in a substantial change in the company's shareholder structure. Some of eHi's existing shareholders will roll over into the new structure. We estimate these shareholders currently hold approximately 22% of the company's common shares. Also, we believe it is possible that some existing shareholders could increase their holdings as part of the transaction. The details of the transaction are still not available. The (potential) new shareholders include several private equity funds. In our opinion, ownership by private equity funds could cause eHi's financial policy to turn more aggressive.

The consortium currently plans to fund part of the transaction from an incremental US$200 million loan. If the financing structure or the consortium's relative equity contribution changes, it could increase debt leverage at eHi, possibly triggering a change of control clause in the company's offshore notes.

Based on eHi's reported unaudited financial statements for 2017, we estimate the company's EBIT interest coverage at 1.5x-1.7x, ratio of debt to capital at 55%-60%, and ratio of funds from operations (FFO) to debt at 15%-20%.

We aim to resolve our CreditWatch placement over the next three to six months, once greater clarity on eHi's privatization plan emerges, mainly details of the new shareholder structure and funding alternatives to complete the transaction.

We may lower the rating if: (1) the transaction substantially increases eHi's debt, causing its EBIT interest coverage to decline to less than 1.3x or FFO-to-debt ratio to drop below 20%; (2) the company adopts a more aggressive financial policy; or (3) the exit or dilution of eHi's existing controlling shareholders triggers an early redemption of the company's offshore notes, exposing it to liquidity risks.

We may affirm the rating if the transaction does not materially increase eHi's debt or leverage, and the existing controlling shareholders retain their material control over the company to ensure the consistency of its strategy and financial policies.

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