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Related Issuers
Rating Action:

Moody's assigns CITIC Pacific Notes Ba1

06 Apr 2011

Hong Kong, April 06, 2011 -- Moody's Investors Service has assigned a provisional (P)Ba1 rating to the Euro Medium Term Notes (EMTN) Program of CITIC Pacific Ltd and a Ba1 rating to the 10-year notes drawn under the EMTN Program.

Moody's has also affirmed CITIC Pacific's Ba1 corporate family rating.

The outlook on all ratings is stable.

CITIC Pacific also proposes to issue perpetual hybrid securities. The notes proceeds and the perpetual hybrid securities will be used for refinancing existing debt and general corporate purposes.

RATINGS RATIONALE

"The Ba1 rating incorporates CITIC Pacific's standalone Ba3 rating and a two-notch uplift reflecting Moody's assessment of the expected strong support that its major shareholder, CITIC Group (rated Baa2), is likely to provide in case of need," says Kai Hu, a Moody's VP and Senior Analyst.

The standalone Ba3 rating is underpinned by a moderated diversified business portfolio, which includes (1) a greenfield iron ore project with significant execution risk, (2) two other core businesses in the cyclical steel and property development segment, and (3) a few cashflow stable, non-core businesses.

"Despite big progress made on the Sino Iron Ore project, which is expected to start pilot production in July 2011, CITIC Pacific still needs to spend a large amount of capital expenditure to complete the project. Its credit metrics will therefore remain weak until its iron ore division starts to produce meaningful cashflow," adds Hu.

"However, Moody's takes comfort that the other businesses of CITIC Pacific delivered better than expected results in 2010 and the company has also been divesting its non-core assets, which partially alleviated its tight funding position," says Hu.

CITIC Pacific's plan to refinance maturing debt with the 10-year senior notes and perpetual hybrid securities will help improve its debt maturity profile. Moody's will not rate these perpetual securities, but we would expect that these hybrid instruments will have a 50% debt and an 50% equity component for the purposes of calculating leverage. The equity element of the hybrid securities will, to a certain extent, provide relief on the total debt/consolidated net worth covenant under its syndicated loan facilities. Its liquidity position is considered moderate, mainly supported by HKD24 billion cash-on-hand and HKD18 billion in unused committed credit facilities as of end-2010.

The two-notch uplift to final Ba1 rating reflects the expected strong support from CITIC Group in times of difficulties. In addition to CITIC Group's majority ownership, the timely support it has provided to cover CITIC Pacific's large derivative losses in late 2008 is clear evidence of this support.

The stable outlook reflects Moody's expectation that: (1) CITIC Pacific's iron ore project will progress according to its current schedule given that there is clearer visibility on milestone and total costs; (2) the perpetual securities, if successfully raised, will provide some relief on its loan covenants; and (3) it's other business lines will continue to provide relatively stable cashflow in the next one or two years.

Upward rating pressure could emerge if the iron ore project starts commercial operations and produces sustainable cashflow, which may result in meaningful deleverage.

Credit metrics that Moody's will consider for an upgrade include: funds from operations (FFO)/debt above 15-20% and FFO interest coverage above 4-5x on a sustained basis.

Downward rating pressure could evolve if CITIC Pacific's (1) iron ore project significantly misses its milestones; (2) other businesses perform below expectation; (3) liquidity profile deteriorates.

The financial indicators that Moody's will look for are: FFO/debt not rebounding to 10-15% and FFO interest coverage not rebounding to 3-4x in the next two years.

A downgrade of CITIC Group, which is unlikely in the near term, will also prompt a review of the rating uplift provided to CITIC Pacific.

The last rating action with respect to CITIC Pacific was on February 12, 2010 when the outlook on its Ba1 rating was changed to stable from negative.

Methodological Approach

The methodological approach applied in rating CITIC Pacific is found in "Analytical Consideration in Assessing Conglomerates", published in September 2007, which can be found at www.moodys.com in the Credit Policy & Methodologies directory, in the Rating Methodologies subdirectory. Other methodologies and factors that may have been considered in the process of rating CITIC Pacific can also be found in the Credit Policy & Methodologies directory.

CITIC Pacific Ltd, listed in Hong Kong, is a conglomerate that is 57.6% owned by CITIC Group. It was one of the first Chinese companies to list and invest outside of China. It is engaged in a range of businesses, including special steel manufacturing, iron ore mining, property development and investment, power generation, aviation, infrastructure, communications and distribution.

CITIC Group, headquartered in Beijing, is a conglomerate investment company wholly owned by the State Council of the Chinese government.

REGULATORY DISCLOSURES

Information sources used to prepare the credit rating are the following: parties involved in the ratings, public information, and confidential and proprietary Moody's Investors Service information.

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Please see ratings tab on the issuer/entity page on Moodys.com for the last rating action and the rating history.

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Hong Kong
Kai Hu
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service Hong Kong Ltd.
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (852) 3551-3077

Hong Kong
Gary Lau
MD - Corporate Finance
Corporate Finance Group
Moody's Investors Service Hong Kong Ltd.
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (852) 3551-3077

Moody's Investors Service Hong Kong Ltd.
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Moody's assigns CITIC Pacific Notes Ba1
No Related Data.
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