August 25, 2017 / 8:46 AM / 4 months ago

Fitch Affirms Bright Food Group at 'A-'; Outlook Stable

(The following statement was released by the rating agency) HONG KONG/SHANGHAI, August 25 (Fitch) Fitch Ratings has affirmed China-based Bright Food (Group) Co., Ltd.'s (BFG) Long-Term Issuer Default Rating (IDR) at 'A-'. The Outlook is Stable. Fitch has also affirmed the company's senior unsecured rating and the ratings of all outstanding bonds at 'A-'. A full list of rating actions is at the end of this release. Fitch rates BFG by notching down from Shanghai's State-Owned Assets Supervision and Administration Commission (Shanghai SASAC), given the strong linkage between the two. BFG is Shanghai's largest vertically integrated agricultural and food product supplier and is ultimately 100% owned by Shanghai SASAC. KEY RATING DRIVERS Pivotal Policy Role Intact: Fitch sees BFG maintaining its pivotal policy role as the company and its subsidiaries store 100% of Shanghai's edible oil reserves, 85% of its policy grain reserves, and supply 45% of the municipality's vegetable and edible agricultural produce. Fitch also believes BFG has an indispensable task in safeguarding the city's food quality and as more food-safety regulations are enacted, BFG will solidify its policy role in the industry. Direct Government Support: BFG has consistently enjoyed direct financial support in the form of government grants, equity injections and land injections. The company received annual government grants of CNY723 million, CNY2.4 billion and CNY2.6 billion in 2014, 2015 and 2016, respectively. The Shanghai government also made a total equity injection of CNY1.94 billion in the past three years and transferred land assets worth CNY10.8 billion in the past two years. M&A Slowdown, Consolidation Continues: BFG has been acquiring overseas food companies in the last few years but recently sold its 60% stake in Weetabix Limited in 2017 for net proceeds of about GBP840 million. The management said BFG is now committed to integrating the companies it has acquired and to lowering the company's leverage. In addition, Shanghai SASAC injected Shanghai Fisheries Group Co., Ltd into BFG in May 2017. The slowdown in M&A activity and the further integration of BFG's overseas assets are likely to help BFG improve its operational performance and gradually stabilise leverage. Fitch considers the asset injection of Shanghai Fisheries into BFG as further evidence of Shanghai SASAC's intention to make BFG the main food provider among Shanghai's state-owned companies. Controllable Leverage, Moderate Coverage: Fitch expects BFG's leverage to remain high but relatively controlled at around 6x in the next few years as a result of fluctuations in working capital, continued capital expenditure and gradual improvement in funds from operations (FFO). BFG's leverage - measured by FFO adjusted net leverage - remained high at 6x at end-2016 as the result of its large international acquisitions of food companies. BFG's fixed charge coverage was moderate at around 2x as it has low debt financing cost, a benefit from its status as a state-owned enterprise (SOE) and its solid bank relationships. DERIVATION SUMMARY Fitch assesses BFG's rating by notching down from its internal assessment of the creditworthiness of Shanghai SASAC, reflecting the close linkage between the two entities. BFG is Shanghai's largest vertically integrated trader and supplier of agricultural and food products and services, and is fully owned by Shanghai SASAC. BFG has a similar role of providing food security as COFCO (Hong Kong) Limited's (A-/Stable) parent, COFCO Corporation, which has a more national scope. BFG's strategic importance to its government stakeholder is relatively lower compared with COFCO's due to BFG's lack of a diplomatic role, limited government intervention in its M&A and its limited supporting role for other SOEs. KEY ASSUMPTIONS Fitch's key assumptions within our rating case for the issuer include: - Revenue growth at 11% and 6% in 2017 and 2018 - EBITDA margin to remain around 7% in 2017 and 2018 - Capital expenditure to remain at around CNY7 billion per annum RATING SENSITIVITIES Future Developments That May, Individually or Collectively, Lead to Positive Rating Action -an upgrade of Fitch's internal assessment of the creditworthiness of the Shanghai Municipality Future Developments That May, Individually or Collectively, Lead to Negative Rating Action -a lowering of Fitch's internal assessment of the creditworthiness of the Shanghai Municipality or evidence of a weakening of BFG's legal, operational, and strategic linkages with the Shanghai Municipality. LIQUIDITY Ample Liquidity: BFG had total cash and equivalents of CNY33 billion and unutilised bank facilities of CNY210 billion at end-Dec 2016, which are more than sufficient to repay and refinance its outstanding short-term debt of CNY44 billion. FULL LIST OF RATING ACTIONS Bright Food (Group) Co., Ltd. Long-Term Foreign-Currency IDR affirmed at 'A-'; Outlook Stable Senior unsecured rating affirmed at 'A-' Issued by Bright Food Singapore Holdings Pte. Ltd. and guaranteed by BFG EUR400m 1.625% senior notes due 2019 affirmed at 'A-' Issued by Bright Food Singapore Holdings Pte. Ltd. and guaranteed by BFG EUR800m 1.125% senior notes due 2020 affirmed at 'A-' Issued by Bright Food Hong Kong Limited and guaranteed by BFG USD500m 3% senior notes due 2018 affirmed at 'A-' Contact: Primary Analyst Yee Man Chin Director +852 2263 9696 Fitch (Hong Kong) Limited 19/F Man Yee Building 68 Des Voeux Road Central, Hong Kong Secondary Analyst Li Chen Analyst +86 21 5097 3009 Committee Chairperson Kalai Pillay Senior Director +65 6796 7221 Summary of Financial Statement Adjustments - Business taxes and surcharges have been deducted from revenue Outstanding bonds are adjusted to face value Media Relations: Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: wailun.wan@fitchratings.com. 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