Fitch Rates Jiuquan Iron & Steel's Proposed USD Notes 'BBB-(EXP)'.
The proposed notes will be issued by Jisco SR Pearl Ltd., a wholly owned subsidiary of JISCO, and unconditionally and irrevocably guaranteed by JISCO. The notes are rated at the same level as JISCO's senior unsecured rating because they constitute its direct and senior unsecured obligations. The final rating is subject to the receipt of final documentation conforming to information already received.
JISCO is owned by the Gansu State-owned Assets Supervision and Administration Commission (Gansu SASAC). Fitch assesses the company's ratings based on the agency's Government-Related Entities Rating Criteria. As a result, Fitch uses a top-down rating approach and notches JISCO's rating below the agency's internal assessment of the creditworthiness of Gansu province.
KEY RATING DRIVERS
Strong Linkage with Gansu: Fitch assesses JISCO's status, ownership and control by the Gansu government, which indirectly owns 94.7% of JISCO, as 'Strong' due to the company's strategic importance to the province as its sole provincial steel platform and the largest producer in north-west China. JISCO accounts for almost 100% of the province's steel output.
Fitch assesses JISCO's support record as 'Moderate'. The company has received intangible and financial support from the provincial government, including reduced income tax rates for its major subsidiaries developing projects in western China, easy access to bank financing and subsidies for the operation of its steel and Jamaica bauxite projects. However, those forms of support have not been consistent and are insufficient to maintain JISCO's standalone financial position at a reasonably healthy level.
High Incentive to Support: We assess the financial implications on Gansu province, should JISCO default, as 'Strong' as it would have a significant impact on the availability and cost of funding for the province. JISCO is Gansu's second-largest state-owned enterprise (SOE) by revenue and its main plant in Jiayuguan City is the largest steel production base in north-west China. A default by JISCO would severely affect funding for SOEs in Gansu and steelmakers in China.
Fitch assesses the socio-political implications for the Gansu government, should JISCO default, as 'Moderate', as it could result in a temporary steel shortage in the region, until other producers in nearby provinces make up the shortfall. However, given JISCO's dominant market position in Gansu and north-west China, its failure may disrupt supply to local infrastructure and property projects that rely on steel products. Moreover, Jiayuguan City was developed initially by JISCO under China's strategic plan to establish a steel production base in north-west China. A default by JISCO would result in loss of significant employment and affect the social stability of the city.
Weak Standalone Profile: JISCO's standalone credit profile is assessed at 'B-' due to its high leverage and weak profitability. JISCO's steel operations are profitable, but this is partly offset by its aluminium operations, which were unprofitable in 1H18 due to a lack of self-sufficiency in raw materials, such as bauxite and alumina, that were getting more expensive. We expect JISCO's EBITDA margin to decline to 6%-7% in 2018-2020 (2017: 7.8%) and its capex to increase from 2019 as development on its Jamaican alumina project commences. This will result in its FFO adjusted net leverage remaining high at 9x in the near term.
JISCO's coverage ratio remained healthy with its FFO fixed-charge coverage ratio averaging 2.5x from 2016-2017, aided mainly by its dominant SOE status, which gives it access to cheaper funding. The standalone credit assessment also takes into account the company's high reliance on short-term debt (end-2017:CNY45.4 billion or 77% of total debt).
JISCO's 'BBB-' rating is linked to, but not equalised with, Fitch's internal assessment of the creditworthiness of Gansu province, as per Fitch's Government-Related Entities Rating Criteria. JISCO's strong linkage with Gansu SASAC is reflected in its position as the sole provincial steel platform in the province, with close to 100% market share by output in Gansu, and the largest producer in north-west China.
JISCO's notching from its parent is similar to that of steel producer HBIS Group Co., Ltd.'s (BBB+/Stable) from the credit profile of Hebei province. HBIS is owned by Hebei SASAC and is the largest steelmaker in Hebei province, where steelmaking is a major economic driver. Similarly, JISCO is the sole steel SOE in Gansu, and the second-largest provincial SOE by revenue and its income taxes are one of the leading contributors to the local government's revenue.
The socio-political implications of default for both are considered 'Moderate' due to the commercial nature of their operations. The financial implications of default for HBIS are considered 'Very Strong' because of the steel industry's importance to Hebei province, and HBIS's position as the largest SOE in the province.
Fitch's Key Assumptions Within Our Rating Case for the Issuer
- Annual capex of CNY1.7 billion in 2018, CNY3.7 billion in 2019 and CNY2.7 billion in 2020, in line with company's guidance
- Operating EBITDA margin at 6%-7% for 2018 to 2021 (2017: 7.8%)
- Fitch's price assumptions for iron ore (China import iron ore fines 62%, CFR): USD65 per tonne in 2018, USD60 in 2019 and USD55 in 2020 and 2021.
- Fitch's price assumptions for aluminium (LME spot): USD2,150 per tonne in 2018 and 2019 and USD2,250 in 2020 and 2021.
Developments that May, Individually or Collectively, Lead to Positive Rating Action
- Upgrade of Fitch's internal assessment of the creditworthiness of Gansu province
- Stronger likelihood of support from Gansu province to JISCO
Developments that May, Individually or Collectively, Lead to Negative Rating Action
- Downgrade of Fitch's internal assessment of Gansu province's creditworthiness
- Weaker likelihood of support from Gansu province to JISCO
High Reliance on Short-Term Refinancing: JISCO relies heavily on short-term refinancing. Its short-term debt accounted for 75%-86% of total debt from 2014-2017. As of end-2017, JISCO had available cash of CNY6.6 billion and CNY33.4 billion of unused banking facilities, against total short-term debt of CNY45.4 billion and a negative free cash flow of CNY1.1 billion. However, these banking facilities are uncommitted; committed facilities are uncommon in the Chinese banking environment.
Currently, it has one domestic super and short-term commercial paper with an outstanding amount of CNY1 billion and coupon rate of 5.65% due 14 May 2019, and the rest of its debt are bank loans, the majority of which are unsecured. In addition, its guarantees to non-subsidiaries are low with outstanding amount of CNY1.5 billion due September 2021, which is reflected in our total adjusted debt calculation
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|Publication:||Daily the Pak Banker (Lahore, Pakistan)|
|Date:||Jan 28, 2019|
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