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Aug 21 (Reuters) - (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.