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Announcement:

Moody's: Most of non-property Chinese companies can withstand a 10% weakening of the RMB

 The document has been translated in other languages

01 Sep 2015

NOTE: On September 02, 2015, the press release was corrected as follows: In the first sentence of the twelfth paragraph, “net debt/EDITDA” was changed to “debt/EBITDA” and “fall” was changed to “rise”. Revised release follows.

Hong Kong, September 01, 2015 -- Moody's Investors Service says that most of the 70 rated Chinese utility, infrastructure and non-property companies that it analyzed in a just-released report have sufficient financial cushion to withstand a 10% depreciation of the renminbi (RMB). This 10% depreciation assumption includes the depreciation that followed the 11 August change in the mechanism for determining the daily fixing rate of the renminbi against the US dollar.

"The 70 companies that we analyzed held 48% of their debt in currencies other than renminbi as of 31 December 2014, including offshore bonds and bank loans," says Clement Wong, a Moody's Associate Managing Director. "Most of that debt was unhedged."

"Nonetheless, some of these companies generate revenues in US dollars. These revenues provide a natural hedge against interest expenses and principal amounts rising in renminbi terms," adds Associate Managing Director Vivian Tsang. "Other companies, particularly investment-grade ones, have strong liquidity positions, and low to moderate debt levels."

Moody's analysis is contained in its just-released report titled "Non-Property Companies -- China: Most Rated Companies Can Manage Modest Renminbi Depreciation."

Of the 70 companies, only one investment-grade company and four speculative-grade ones will come under increased downward rating pressure, under Moody's analysis of a 10% weakening of the RMB.

Moody's identified gas utility Binhai Investment Company Limited ((P)Baa3 stable) as the sole investment-grade company that will come under greater downward rating pressure under the 10% depreciation scenario.

Fifty-five percent of the company's debt was denominated in foreign currency at year-end 2014, and the company shows limited financial headroom owing to its small business scale and geographic concentration.

As for the four speculative-grade companies, Moody's named Anton Oilfield Services Group (Caa1 negative), Yanzhou Coal Mining Co. Ltd. (Ba2 negative), China Oil and Gas Group Limited (Ba1 negative) and the auto rental provider, CAR Inc. (Ba1 stable).

Anton Oilfield's credit metrics are negatively affected by low global oil prices, so a weakening of the RMB would exacerbate its weak business fundamentals and high debt levels.

Yanzhou Coal's adjusted net debt/EBITDA would exceed its downgrade trigger of 6x if the RMB weakens by 10% but would be partially offset by natural hedging from its Australian operations and parental support.

China Oil and Gas' adjusted debt to capitalization would approach Moody's rating tolerance level of 50% if the same currency situation occurs.

CAR Inc.'s projected debt/EBITDA would rise to the downgrade trigger of 3.5x under the depreciation scenario. But that ratio is likely to improve to around 3.3x in 2016 as contribution from new vehicles are recognized.

The 10% sensitivity analysis that Moody's conducted on the 50 rated investment-grade and 20 speculative-grade companies reflects a level of RMB depreciation that is worse than Moody's expects.

The Moody's report notes that other factors could counterbalance the impact of renminbi depreciation. For example, greater exchange-rate flexibility could provide the Chinese authorities with additional scope to ease monetary conditions to support the economy.

If this scenario were to occur, the reduction in domestic interest rates would lower interest costs on domestic borrowings, softening both the impact of higher US dollar-denominated interest costs in renminbi terms, and the deterioration in rated companies' debt metrics.

In addition, a 10% depreciation of the RMB could stimulate export growth, with possible economic benefits for many of the non-property companies that Moody's rates.

Near-term refinancing risk of US dollar bonds is low for the rated portfolio. Most of the bonds due by August 2016 were issued by state-owned enterprises. We expect they will be able to refinance this debt given their good access to debt markets because of their government backing.

Subscribers can access the report at: http://www.moodys.com/viewresearchdoc.aspx?docid=PBC_1007819

Moody's offers complimentary access to its new topic page, China: Reform and Rebalancing, a centralized source for Moody's research related to key credit issues in China as the country's rebalancing story unfolds. This report is part of Moody's ongoing coverage on this theme. Register today at www.moodys.com/chinarebalancing for access to all research on this page.

Recent Moody's publications relating to China Reform and Rebalancing include:

China, Government of

Property - China: Rated Developers Have Headroom to Withstand Modest RMB Depreciation

Government of China: Advance in Exchange Rate Reform Is Credit Positive for the Sovereign

Chinese and Indian Auto ABS: Two Very Different Markets When it Comes to Forms of Credit Enhancement

China Airport Sector: Diverging Credit Quality of Hub and Smaller Airports

Quarterly China Shadow Banking Monitor (Presentation)

Eurasian Sovereigns: China's Belt and Road Strategy -- Credit Positive for Emerging Markets

China Property Focus - July 2015

China: One Belt, One Road Is Credit Positive, Despite Rising Overseas Risk Exposure (Presentation)

Inside China - July 2015

These reports are available at http://www.moodys.com/chinarebalancing

NOTE TO JOURNALISTS ONLY: For more information, please call one of our global press information hotlines: New York +1-212-553-0376, London +44-20-7772-5456, Tokyo +813-5408-4110, Hong Kong +852-3758-1350, Sydney +61-2-9270-8141, Mexico City 001-888-779-5833, São Paulo 0800-891-2518, or Buenos Aires 0800-666-3506. You can also email us at mediarelations@moodys.com or visit our web site at www.moodys.com.

This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page on www.moodys.com for the most updated credit rating action information and rating history.

Vivian Tsang
Associate Managing Director
Project & Infrastructure Finance
Moody's Investors Service Hong Kong Ltd.
24/F One Pacific Place
88 Queensway
Hong Kong
China (Hong Kong S.A.R.)
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (852) 3551-3077

Gary Lau
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (852) 3551-3077

Releasing Office:
Moody's Investors Service Hong Kong Ltd.
24/F One Pacific Place
88 Queensway
Hong Kong
China (Hong Kong S.A.R.)
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (852) 3551-3077
Moody's: Most of non-property Chinese companies can withstand a 10% weakening of the RMB

No Related Data.
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