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Rating Action:

Moody's assigns Baa3 to proposed notes guaranteed by Shanghai Huayi

 The document has been translated in other languages

18 Oct 2019

Hong Kong, October 18, 2019 -- Moody's Investors Service has assigned a Baa3 rating to the proposed USD senior unsecured notes to be issued by Huayi Finance I Ltd. and guaranteed by Shanghai Huayi (Group) Company (Shanghai Huayi, Baa3 stable). Huayi Finance I Ltd. is an indirect wholly-owned subsidiary of Shanghai Huayi.

The proceeds from the proposed issuance will be used to refinance Shanghai Huayi's existing indebtedness and for general corporate purposes.

RATINGS RATIONALE

The Baa3 rating on the proposed notes reflects the irrevocable and unconditional guarantee from Shanghai Huayi and the fact that the securities will rank pari-passu with other present and future unsecured and unsubordinated obligations of Shanghai Huayi.

The proposed notes will not materially increase Shanghai Huayi's overall debt level because the majority of the bond proceeds will be used to refinance the company's existing debt. The notes will also improve Shanghai Huayi's liquidity and debt maturity profile.

Shanghai Huayi's leverage for the 12 months to 30 June 2019 — as measured by adjusted debt/EBITDA — stayed solid at 3.4x, because the company improved its cost structure, which mitigated the impact of lower chemical prices, while maintaining a stable debt level in 1H 2019.

Moody's expects that Shanghai Huayi's leverage will slightly weaken but remain resilient at 4.0x-4.5x in 2019-2020, against the backdrop of weak chemical selling prices, which will be partially offset by its stable production levels and low operational costs.

Shanghai Huayi's Baa3 issuer rating reflects (1) the company's Baseline Credit Assessment (BCA) of ba2; and (2) a two-notch uplift, based on Moody's assessment of a strong likelihood of support for the company from and high level of dependence on the Shanghai municipal government, and ultimately the Government of China (A1 stable).

The strong support assessment is underpinned by Shanghai Huayi's full ownership by the Shanghai municipal government, integrated role as a major supplier to the regional chemical industry, and receipt of large amounts of subsidies from the municipal government.

The support assessment also considers the reputational and contagion risks that may arise if the company were to default. As such, Moody's believes the central government would support efforts by the Shanghai municipal government to prevent Shanghai Huayi from defaulting; thereby avoiding disruption to the domestic financial markets.

These factors are counterbalanced by Shanghai Huayi's commercially driven business operations.

The high dependence level reflects the fact that Shanghai Huayi and the central government are exposed to common political and economic event risks.

Shanghai Huayi's ba2 BCA reflects the company's (1) large business scale and established track record in the domestic markets; (2) diversified product portfolio, which helps mitigate individual product profitability cycles; and (3) large cash balance and substantial land reserves in Shanghai.

At the same time, Shanghai Huayi's BCA is constrained by the company's (1) primary exposure to the commodity chemical business; (2) modest profitability; and (3) high capital spending to expand production capacities.

The rating also takes into account the following environmental, social and governance considerations.

As a commodity chemical producer, Shanghai Huayi is exposed to elevated environmental and social risks because of increasing environmental regulations and growing social awareness and pressure associated with certain products. Such risks are mitigated by the company's good track record of complying with environmental protection regulations and managing the safety of its productions.

In terms of corporate governance, as a state-owned enterprise 100% owned by the Shanghai municipal government, Shanghai Huayi has its annual business plan and performance evaluated by the Shanghai State-Owned Asset Supervision and Administration Commission. It also maintains prudent financial policies, as shown by its large cash balance of RMB14.0 billion or around 63% of its reported gross debt at 30 June 2019.

Moody's will consider upgrading Shanghai Huayi's ratings if the company maintains (1) resilient business and financial profiles through the chemical industry cycles; and (2) its current strong liquidity profile.

Credit metrics that Moody's will consider for an upgrade include adjusted debt/EBITDA below 3.0x-3.5x on a sustained basis.

Moody's could also upgrade Shanghai Huayi's ratings without an improvement in the company's BCA, if Moody's assesses an increased level of government support for the company.

On the other hand, Moody's could downgrade the ratings if (1) the company's competitiveness and business sustainability worsen; (2) its leverage increases through aggressive debt-funded investments and expansions; or (3) its liquidity position materially weakens.

Credit metrics that Moody's will consider for a downgrade include adjusted debt/EBITDA above 5.5x on a sustained basis.

Moody's could also downgrade Shanghai Huayi's ratings without lowering its BCA, if Moody's assesses that government support for the company has weakened.

In addition, any material reduction in ownership of the company by the Shanghai municipal government or in Shanghai Huayi's ownership of its key listed subsidiaries will pressure the company's ratings.

The methodologies used in this rating were Chemical Industry published in March 2019, and Government-Related Issuers published in June 2018. Please see the Rating Methodologies page on www.moodys.com for a copy of these methodologies.

Shanghai Huayi (Group) Company is a major producer of commodity chemicals in China.

The company has five major segments: (1) Energy Chemicals, (2) Advanced Materials, (3) Green Tires, (4) Specialty Chemicals, and (5) Chemical Services.

It produces basic chemicals, clean energy products, tires, plastics, coatings, dyestuffs and pigments, fluorine chemicals, reagents, additives and chemical equipment.

In 2018, Shanghai Huayi generated total revenue of RMB60.8 billion and reported assets of RMB71.1 billion.

The local market analyst for this rating is Jin Wu, +86 (212) 057-4021.

REGULATORY DISCLOSURES

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security 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.

Moody's considers a rated entity or its agent(s) to be participating when it maintains an overall relationship with Moody's. Unless noted in the Regulatory Disclosures as a Non-Participating Entity, the rated entity is participating and the rated entity or its agent(s) generally provides Moody's with information for the purposes of its ratings process. Please refer to www.moodys.com for the Regulatory Disclosures for each credit rating action under the ratings tab on the issuer/entity page and for details of Moody's Policy for Designating Non-Participating Rated Entities.

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
VP - Senior Credit Officer
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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