TEXT-Fitch cuts Winsway to 'BB-', outlook negative

Fri Oct 5, 2012 5:58am EDT

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(The following statement was released by the rating agency)

Oct 05 - Fitch Ratings has downgraded Hong Kong-based Winsway Coking Coal Holdings Ltd's (Winsway) Long-Term Issuer Default Rating (IDR) and senior unsecured rating to 'BB-' from 'BB', due to its worse-than-expected business performance arising from the volatile coking coal environment. The Outlook is Negative.

Fitch is of the view that Winsway's operation is not robust enough to defend its margins in the current severe down-cycle in Chinese coking coal demand. The company reported an operating loss for H112, its first since its IPO in 2010. The agency expects profitability will not recover to 2011 levels as sales volume decline and lower coking coal prices also affect its profit margins. The supply agreements Winsway has with steel mill customers continue to be renegotiated during the downcycle due to the company's weaker bargaining power.

The Negative Outlook reflects the uncertainty prevailing over coking coal demand and the risk that prolonged volatility of coking coal prices may further damage Winsway's business model. This may eventually affect the company's liquidity position, which is a concern given that in 2014, the company needs to start repaying the loan it took to acquire Grand Cache Coal. The Outlook may be revised back to Stable on evidence of sustainable stability of volumes and margins.

Fitch has not downgraded Winsway to the 'B' rating category due to its adequate liquidity. The company has adopted a strategy of reducing inventory to improve its cash balance amid the difficult market conditions. This has been sufficient to offset the weak cash generation due to poor profitability in 2012, and to help partly fund its Grand Cache Coal acquisition.

Furthermore, Winsway's longer term prospects remain supported by increasing demand for Mongolian coal by Chinese steel mills. Mongolian coking coal producers are among the lowest cost producers globally. Furthermore, proximity to Chinese steel mills and the high quality of Mongolia coking coal also support this trend. Mongolia has replaced Australia as the largest exporter of coking coal to China in 2011 and 2012.

The announcement that Aluminum Corporation of China Limited (Chalco, 'BBB+'/Stable) has terminated its plan to acquire a 29.9% stake in Winsway may see both companies eventually competing in the logistics of importing coking coal from Mongolia. However, Fitch expects that some cooperation will persist between the two companies given the synergies between the two.

WHAT COULD TRIGGER A RATING ACTION?

Negative: Future developments that may, individually or collectively, lead to negative rating action include:

-gross profit falling below HKD150/ton on a sustained basis

-sustained negative free cash flow

Positive: As the current Rating Outlook is Negative Fitch's sensitivities do not currently anticipate developments with a material likelihood, individually or collectively, of leading to a rating upgrade.

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