ASIA CREDIT-Bets on CITIC Resources debt despite downgrade fears

By Umesh Desai

HONG KONG, Oct 24 (Reuters) - CITIC Resources Holdings Ltd's business fundamentals are sound and its bonds could be a good investment bet as prices fell after Standard & Poor's warned of a downgrade, analysts say.

China's fourth-largest oil producer, which also has interests in aluminium, coal, manganese and the import and export of commodities, is seen as a quasi-sovereign entity by some due to government support.

S&P placed its BB-plus rating on watch with negative implications after a disclosure by steel-to-property conglomerate CITIC Pacific (0267.HK), part of the CITIC Group, that it may incur a loss of US$2 billion from unauthorised currency trading.

S&P said CITIC Pacific is significantly important to the CITIC group, which owns 29 percent in the company and has agreed to arrange a standby loan facility of $1.5 billion.

The agency said the required financial support is likely to have a significant negative effect on CITIC Group's financial leverage and profitability.

"There is no change in the standalone credit quality of CITIC Resources but rather a change of rating of the holding company," said S&P rating analyst Lawrence Lu while adding that the subsidiary will be rated one notch below CITIC Group.

CITIC Group's BBB-minus rating has been placed by S&P on review with negative implications.

However, not all analysts agree there would be support coming from the holding company.

"It is still a high-growth relatively untested name and any support from its parent is expected to be limited," said Brayan Lai, credit analyst with Calyon Corporate & Investment Bank.

Others are surprised by S&P's action and say the sell-off subsequent to the agency's move is a buying opportunity.

"It is on technical grounds," said Warut Promboon, credit analyst with ING, who revised his recommendation on CITIC Resources (1205.HK) bonds due in 2014 VG030176880=RRPS to overweight from neutral after S&P's warning.

The bonds have reacted immediately to the negative watch decision. The yield has spiked to about 20 percent off an initial high of 24 percent. Yields were around 8 percent in June.

"We view CITIC Resources as a quasi-sovereign entity and a 20 percent yield is quite good. If everything is priced in, this should be a good buy at these levels," said ING's Warut.

Its shares have fallen 87 percent this year and its market capitalisation of HK$3.5 billion is far less than its total bond outstanding of $US1 billion, reflecting investors' preference for the debt component of the capital structure.

Moody's Investors Service, on the other hand expects the support from the CITIC group to remain undiminished.

It retained the Ba2 rating and the stable outlook this week.

"Moody's does not expect that the potential support provided by CITIC Group to CITIC Resources, if necessary, would decline to the extent that would affect the latter's creditworthiness," said its analyst Renee Lam. She said CITIC Resources has the ability to support its own capital expenditure and the losses at CITIC Pacific were unlikely to have a significant impact on the credit standing of CITIC Resources. (Editing by Tomasz Janowski)