November 10, 2017 / 8:32 AM / a year ago

Fitch Upgrades Baosteel Resources to 'A-'/Stable; Resolves Rating Watch Evolving

(The following statement was released by the rating agency) HONG KONG/SHANGHAI, November 10 (Fitch) Fitch Ratings has upgraded Baosteel Resources International Company Limited's (BRI) Long-Term Foreign-Currency Issuer Default Rating (IDR) to 'A-' from 'BBB+'. The Rating Watch Evolving (RWE), in place since 28 June 2016, has been resolved and Outlook is Stable. A full list of rating actions is at the end of this rating action commentary. BRI's removal from RWE and rating upgrade follow a rating upgrade of BRI's 100% parent, China Baowu Steel Group Corporation Limited, to 'A' from 'A-'. KEY RATING DRIVERS Ratings Linked to Parent: BRI is rated one notch below its parent, in line with Fitch's Parent and Subsidiary Rating Linkage criteria, due to the strong linkages between the two entities arising from BRI's unique position as the group's offshore resource-development platform, overseas resource trading platform and offshore financing vehicle. Baowu Steel is rated two notches above its standalone rating of 'BBB+' to reflect potential state support due to its strategic importance to China as the country's largest and most profitable steel company that drives the nation's steel industry development. Key Offshore Financing Platform: BRI's linkage with and importance to Baowu Steel is evident from its unique position as the group's key centralised fund management and financing platform; this excludes Baoshan Iron & Steel Co., Ltd. (Baosteel, A/Stable), a listed steel-making company on the Shanghai Exchange, which manages these functions independently for regulatory reasons. The majority of BRI's unused bank-credit facilities of USD3.3 billion are backed by Baowu Steel's letters of comfort. BRI is Baowu Steel's only subsidiary to receive such support. Offshore Resource Development Platform: BRI is responsible for the group's offshore resource development, an integral part of Baowu Steel's medium- to long-term goal of becoming an integrated steel producer. Baowu Steel has supported BRI through asset and equity injections as well as shareholder loans to facilitate expansion and acquisitions; for instance, the purchase of a majority stake in Australia's West Pilbara iron-ore project. Elevated Leverage on Weak Margins: Fitch expects BRI's leverage to remain elevated in the next two to three years, driven by a Fitch-forecasted weak EBITDA margin of 2.2% in 2017F. This is due to the difficult operating environment for commodity trading companies. Capex is likely to remain low, at USD20 million in 2017, and remain so until post-2020, as the construction of the West Pilbara iron ore project has been delayed. DERIVATION SUMMARY BRI is rated one notch below its parent. The strong linkage between the two entities reflects BRI's unique position as the group's offshore resource development platform, overseas resources-trading platform and offshore financing vehicle. The rating gap reflects the currently limited scope for offshore development and that BRI's core business differs from that of its parent. KEY ASSUMPTIONS - Fitch's iron ore price deck: 2017: USD65/tonne, 2018: USD55/tonne, 2019: USD55/tonne, long-term: USD50/tonne - BRI's overall profitability to remain weak until at least post-2020 due to delays in the development of its mining operations (2017F EBITDA margin: 2.2%) - Capex to remain low at around USD20 million per year between 2017 and 2019 due to delays in the development of its mining operations. RATING SENSITIVITIES Baosteel Resources International Company Limited Negative: Developments that may, individually or collectively, lead to negative rating actions include: - Negative rating action on Baowu Steel - Weakening linkages between BRI and Baowu Steel Positive: Developments that may, individually or collectively, lead to positive rating action include: - Positive rating action on Baowu Steel - Strengthening linkages between BRI and Baowu Steel China Baowu Steel Group Corporation Limited Positive: Developments that may, individually or collectively, lead to positive rating action include: - Consistent free cash-flow generation - Improved business profile in terms of product leadership across more industries and geographic expansion, while maintaining a strong financial profile - FFO adjusted net leverage, including adjusted financial assets, below 1.5x on a sustained basis - Stronger linkage with the state Negative: Developments that may, individually or collectively, lead to negative rating action include: - A decline in metal spread (gross profit per tonne of steel product sold) below CNY400 for a sustained period - FFO adjusted net leverage, including adjusted financial assets, exceeding 2.5x for a sustained period - Weakened linkage with the state LIQUIDITY Sufficient Liquidity: BRI had total cash equivalents of around USD388 million and more than USD3 billion in unused banking facilities, compared with short-term debt of USD983 million, as of end-2016. FULL LIST OF RATING ACTIONS Baosteel Resources International Company Limited - Long-Term Foreign-Currency IDR upgraded to 'A-' from 'BBB+'; Outlook Stable and Rating Watch Evolving resolved - Senior unsecured rating upgraded to 'A-' from 'BBB+'. Rating Watch Evolving resolved Baosteel Financing 2015 Pty Ltd - USD500 million 3.875% senior unsecured notes due 2020 upgraded to 'A' from 'A-'. Rating Watch Evolving resolved Contact: Primary Analyst Laura Zhai Director +852 2263 9974 Fitch (Hong Kong) Limited 19/F Man Yee Building 68 Des Voeux Road Central, Hong Kong Secondary Analyst Charles Li Analyst +86 21 5097 3016 Committee Chairperson Kalai Pillay Senior Director +65 6796 7221 Media Relations: Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: Additional information is available on Applicable Criteria Corporate Rating Criteria (pub. 07 Aug 2017) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here Solicitation Status here Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. 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