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Rating Action:

Moody's assigns Baa2 to ChemChina's proposed perpetual notes

 The document has been translated in other languages

Global Credit Research - 19 May 2017

Hong Kong, May 19, 2017 -- Moody's Investors Service has assigned a senior unsecured Baa2 rating to the senior perpetual securities to be issued by CNRC Capitale Limited, reflecting the unconditional and irrevocable guarantee to be provided by China National Chemical Corporation (ChemChina, Baa2 negative), and the notes' pari passu ranking with ChemChina's other present and future unsecured obligations.

The rating outlook is negative.

The proceeds from the securities will be used to refinance ChemChina's existing indebtedness and for general corporate purposes.

RATINGS RATIONALE

Moody's considers the notes as 100% debt-like securities, because the securities have a high step-up cost of 400 basis points per annum after the first call date, and a dividend suspension clause that creates an incentive for the company to prepay the securities. Moody's assessment is despite the notes demonstrating certain hybrid-like features, such as the option of deferred coupons on a cumulative basis, and no put options for investors.

The rating on the perpetual securities reflects: (1) the fact that the securities will rank pari passu with all other present and future unconditional, unsubordinated and unsecured obligations of ChemChina; and (2) Moody's assessment of a low likelihood of ChemChina deferring the coupon over the next 12 months, given that ChemChina is rated Baa2 and maintains an EBITDA to interest coverage ratio at about 2.0x.

However, the rating on the securities could be lowered — relative to ChemChina's issuer rating — if debt with deferral features becomes a substantial portion of its capital structure, or if Moody's believes that the company will likely defer many payments in advance of default.

"Because the proceeds will be mainly used to refinance ChemChina's existing debt, the perpetual securities will not increase the company's overall debt level, but will improve its liquidity and debt maturity profile," says Jiming Zou, a Moody's Vice President and Senior Analyst, and also Moody's Local Market Analyst for ChemChina.

ChemChina's Baa2 issuer rating reflects its baseline credit assessment (BCA) of ba3 and a four-notch uplift, based on Moody's expectation that the company will receive strong support from the Chinese government (Aa3 negative) in times of financial distress.

Moody's assumption of strong support reflects ChemChina's full ownership by the government, its status as the largest chemical company in China by revenue, and its roles of: (1) consolidating the weak, but important domestic chemical industry in China; and (2) securing new chemical technologies and products important to China's chemical and agriculture industries through overseas acquisitions, including the announced acquisition of Syngenta AG (Baa2 under review for downgrade).

ChemChina's ba3 BCA is underpinned by: (1) its large business scale, globally leading market positions in selected products, and large production capacity in many basic chemicals, agrichemicals and chemical new materials, as well as oil processing and refining in the domestic market; (2) its diversified business portfolio, with exposure to various end-user industries; and (3) Moody's expectations that the company's profitability and leverage will improve, after the integration of acquired overseas businesses and the restructuring of its domestic subsidiaries.

At the same time, the company's BCA is constrained by: (1) its weak domestic operations, which show large exposures to oversupplied commodity chemicals, limited capability to produce new products, and a low degree of vertical business integration; (2) operational challenges, due to its fast acquisitive growth, complicated corporate structure, and large number of subsidiaries; and (3) its high debt leverage, because of overseas acquisitions and domestic investments over the past few years.

In addition, Moody's expects that ChemChina will complete its acquisition of Syngenta and finance the acquisition largely by debt. Its resultant financial risk will be partly offset by its broader business profile, deleveraging strategy and strong state support.

The rating outlook on ChemChina's issuer rating is negative, capturing the risk of a potentially weaker credit profile for ChemChina, if its acquisition of Syngenta proceeds as proposed, and the risk that ChemChina will incur an additional USD3 billion in debt to fund the break cost, if the acquisition does not proceed.

Upward pressure on ChemChina's issuer rating is unlikely, given the negative rating outlook. However, the outlook could return to stable, if ChemChina can show a trend of deleveraging towards an adjusted debt/EBITDA of 8.0x-9.0x over the next two years.

The rating could be downgraded, if ChemChina is unlikely to deleverage, such that its debt/EBITDA registers 8x-9x over the next two years. Evidence of weakening support from the government will also pressure the rating.

The methodologies used in this rating were Global Chemical Industry Rating Methodology published in December 2013, and Government-Related Issuers published in October 2014. Please see the Rating Methodologies page on www.moodys.com for a copy of these methodologies.

China National Chemical Corporation (ChemChina), established in 2004, is the largest chemical company in China by revenue. Its business lines include agrochemicals, rubber products, chemical materials and specialty chemicals, industrial equipment, as well as petrochemical processing.

CNRC Capitale Limited is wholly owned by ChemChina.

ChemChina reported RMB300 billion in revenue in 2016. It is 100% owned by the State-owned Assets Supervision and Administration Commission of the State Council of China.

The Local Market analyst for this rating is Jiming Zou, +86 (21) 2057 4018.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

The first name below is the lead rating analyst for this Credit Rating and the last name below is the person primarily responsible for approving this Credit Rating.

Gerwin Ho
Vice President - Senior Analyst
Corporate Finance Group
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
Client Service: 852 3551 3077

Gary Lau
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 852 3758 1350
Client Service: 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
Client Service: 852 3551 3077

No Related Data.
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