(Repeat for additional subscribers)
Aug 21 (The following statement was released by the rating agency)
Fitch Ratings has placed China-based Winsway Coking Coal Holdings Limited's
(Winsway) Issuer Default Rating and senior unsecured ratings of 'B' on Rating Watch Negative
(RWN). This follows yesterday's announcement by the company that it is publicly tendering an
offer to buy back its outstanding USD bonds due 2016 below par and, upon acceptance at
set minimum levels, amend certain covenants.
Key Rating Drivers
Bond buyback opportunistic: Fitch views Winsway's proposal to buy back its 2016
bonds below par as an opportunistic move following a significant drop in bond
price over the past four months. Winsway also proposes to solicit consent to
remove some major bond covenants, which limit debt capacity and require the
coking coal importer to apply asset disposal proceeds to repay these bonds.
Existing bondholders are being asked to voluntarily tender their bonds,
receiving either an immediate cash payment of 42.5% of par plus a 2.5% consent
solicitation fee, or an immediate cash payment of 32.5% of par plus a 2.5%
consent solicitation fee 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 will also be amended. This will also materially
impair bondholders that have not tendered.
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.
Under this scenario, upon announcement that minimum acceptances have been
received to trigger this tender, Fitch would downgrade Winsway's IDR to 'C'. On
confirmation of completion of this exchange, Winsway's rating 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.
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.
Fitch believes that the amendments to the bond covenants, including a 10%
debt/total asset cap, are being sought to avoid a potential future default of
the group's existing debt. This is because expected continuous operational cash
outflows mean Winsway will either need to raise debt, which may trigger a
default of existing debt under the covenants, or need to deploy existing cash
resources, heightening the bonds' refinance risk in 2016.
The company reports that it had HKD1.79bn (USD230m) unrestricted cash at hand as
at 30 June 2013 compared with USD460.5m outstanding unsecured bonds maturing in
April 2016. If bondholders reject the tender, this cash could continue to be
available for debt repayment including 2016 bondholders, together with covenants
remaining in place. Fitch will then review Winsway's liquidity and solvency
prospects to assign appropriate ratings.
Sluggish ASP weakens performance: China's high self-sufficiency in coking coal
makes imported coking coal a marginal market and results in a highly volatile
price environment. China's imported coking coal made up less than 10% of total
demand in 2012. The country's strong coal production capacity, coupled with a
weak world steel market outside China - which saw production contract by 2.2%
for the 12 months to June 2013 - pushed the coking coal market into a cyclical
downtrend for the past 18 months.
Weakening average selling price (ASP) of coking coal across the region has put
Winsway's performance under immense pressure. The company recorded a gross loss
in H113, after its cash gross profit fell to only HKD3/ton in 2012 from
HKD250/ton it made on imported coking coals in 2011. Fitch believes that Chinese
continuing steel consumption growth, as witnessed in the 7.4% growth in H113,
will support growing demand for coking coal in the long run, although oversupply
poses downward pressure on ASP.
Negative: Future developments that may, individually or collectively, lead to
negative rating actions include:
- Success of the tender offer with sufficient existing holders agreeing to
tender their bonds, which will constitute DDE and lead to a downgrade in the
Issuer Default Rating to 'RD' and in the bond rating to 'C';
- Unsuccessful tender offering with acceptance from existing holders falling
below under the minimum levels, which will lead to a review of the issuer's
liquidity and solvency prospects which could result in negative rating action.