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.
Moody's Investors Service considers the quality of information available
on the issuer or obligation satisfactory for the purposes of assigning
a credit rating.
Moody's adopts all necessary measures so that the information it uses
in assigning a credit rating is of sufficient quality and from sources
Moody's considers to be reliable including, when appropriate,
independent third-party sources. However, Moody's
is not an auditor and cannot in every instance independently verify or
validate information received in the rating process.
Please see ratings tab on the issuer/entity page on Moodys.com
for the last rating action and the rating history.
The date on which some Credit Ratings were first released goes back to
a time before Moody's Investors Service's Credit Ratings were fully digitized
and accurate data may not be available. Consequently, Moody's
Investors Service provides a date that it believes is the most reliable
and accurate based on the information that is available to it.
Please see the ratings disclosure page on our website www.moodys.com
for further information.
Please see the Credit Policy page on Moodys.com for the methodologies
used in determining ratings, further information on the meaning
of each rating category and the definition of default and recovery.
Hong Kong
Kai Hu
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service Hong Kong Ltd.
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Hong Kong
Gary Lau
MD - Corporate Finance
Corporate Finance Group
Moody's Investors Service Hong Kong Ltd.
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Moody's assigns CITIC Pacific Notes Ba1