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Sept 25 (The following statement was released by the rating agency)
Fitch Ratings has downgraded China-based Winsway Coking Coal Holdings Limited's (Winsway) Issuer Default Rating and senior unsecured ratings to 'CCC' from 'B' and removed them from Rating Watch Negative. No Outlook has been assigned.
This follows the company's announcement today that it has extended by 10 working days its tender offer to buy back its USD bonds due 2016. The company reported that only 39.5% of outstanding bonds had been tendered to date. This is the second extension since the company first announced the tender offer on 20 August 2013.
We believe that the company's offer is opportunistic and the extension reflects its desire to pursue some form of covenant relaxation within the bonds, especially since the company has now offered the bondholders an option to accept covenant waivers for a consent solicitation fee without tendering the bonds. The intention to forge ahead with this offer does not build positive momentum for the refinancing of the bonds in April 2016 should the bondholders reject the offer.
Key Rating Drivers
Cash Generation Further Deteriorates: We do not expect Winsway's core business to generate positive free cash flow (H113: a reported gross outflow of HKD337m). We believe the prospects for improvement are low, barring a sharp and sustained increase in coking coal prices. This weakens the prospect of increasing cash resources for the bond's repayment in 2016.
Debt Maturity Looms: If the company fails to obtain sufficient acceptances to its offer, it faces a repayment of USD460.5m (HKD3.57bn) of outstanding bonds maturing in 2016. On 30 June 2013, the company reported an unrestricted cash balance of HKD1.79bn, and restricted bank deposits of HKD963m that had been pledged for its bank borrowings.
Refinancing Ability Reduces: We believe that the company will have to rely on refinancing for a significant portion of the scheduled maturity in 2016. However, its continued push to seek covenant waivers on its debt now may worsen the prospects for refinancing this bond.
Buyback Background: Existing bondholders are being asked to voluntarily tender their bonds, receiving either an immediate cash payment of 47.5% of par, or an immediate cash payment of 37.5% of par and cash payment of 25% of par in April 2016. Under the terms of the buyback, cash tenders will be accepted only if a minimum 50% of bond amounts outstanding are tendered. If more than 50% of bondholders (by value) tender, bond covenants, including a 10% debt/total asset cap, will also be amended. This will also materially impair bondholders that have not tendered. The company has now provided an option for bondholders to waive the bond covenants without tendering their bonds for a 2.5% non-tendering consent payment.
DDE if Minimum Bondholders Tender: Fitch will treat the exchange as a Distressed Debt Exchange (DDE) if bondholders tender their bonds, to the minimum level of acceptances required to amend the bond covenants. This is because a material change in terms would be imposed, the group's existing cash resources may be utilised to prepay the bonds below par, and all bondholders are stripped of meaningful covenants, including the requirement to apply asset disposal proceeds to repay the bond.
DDE Dependent on Voting: The voluntary tender offer itself does not constitute a DDE. Under Fitch's criteria a DDE has taken place if both of the following apply: firstly, the restructuring imposes a material reduction in terms compared with the bond's original terms. Here, only if accepted by the required number of bondholders, the less-than-par cash exchange and bond amendments would constitute a material change in terms. Secondly, the exchange is conducted to avoid bankruptcy or a traditional payment default.
Negative: Future developments that may, individually or collectively, lead to negative rating actions include:
- Upon announcement that minimum acceptances have been received to trigger this tender, Fitch would downgrade Winsway's IDR and bond rating to 'C'. On confirmation of completion of this exchange, the IDR would be downgraded to 'restricted default' (RD). Post-execution Fitch expects to rate the company and its bonds based on the new capital structure, ranking of the bonds within the group, its changed liquidity profile, and solvency prospects.
- If the tender offer is not successful, the ratings are likely to be affirmed at current levels.