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Rating Action:

Moody's assigns first-time Baa2 rating to Metallurgical Corporation of China

 The document has been translated in other languages

17 May 2017

Hong Kong, May 17, 2017 -- Moody's Investors Service has assigned a first-time Baa2 issuer rating to Metallurgical Corporation of China Ltd. (MCC).

Moody's has also assigned a Baa2 rating to the proposed USD senior unsecured notes to be issued by MCC Holding (Hong Kong) Corporation Limited and guaranteed by MCC.

The proceeds from the notes will be used for general corporate purposes, including the refinancing of MCC's existing indebtedness.

The ratings outlook is stable.

RATINGS RATIONALE

"MCC's Baa2 issuer rating incorporates its standalone credit strength -- which is equivalent to a Ba2 rating level -- and a three-notch uplift, based on our expectation that the company will receive strong support from its parent, China Metallurgical Group Corporation (CMGC, Baa2 stable), in times of stress," says Chenyi Lu, a Moody's Vice President and Senior Credit Officer.

The high likelihood of extraordinary support from China Metallurgical Group Corporation mainly reflects MCC's high strategic importance to its parent.

MCC accounted for more than 97% of its parent's revenue and assets in 2016. In addition, both companies share the same senior management team.

CMGC's ability to support MCC is underpinned by the former's solid credit quality, which is in turn supported by the high likelihood of support from the Chinese government (Aa3 negative) given its 100% government ownership and policy functions.

Moody's does not expect the forthcoming change in CMGC's shareholder to China Minmetals Corporation (Baa1 negative) from the Chinese government to affect CMGC's willingness or ability to support MCC. This view is because MCC will be the core subsidiary of the ultimate parent China Minmetals. Therefore, China Minmetals should have a strong incentive to support MCC through CMGC in case of a need.

"MCC's standalone credit strength reflects its long track record, large scale, strong market position in China, and business diversity," says Lu, who is also the Lead Analyst for MCC.

MCC has a long track record of more than 60 years in China's construction industry and is the dominant player in the construction of steel plants. MCC's revenue of RMB220 billion in 2016 makes it one of the six largest engineering and construction (E&C) companies in China by revenue.

MCC also has a competitive position in the building and transportation-infrastructure construction sectors, and the growth in the contribution of these sectors helps reduce the impact of its weakening metallurgical construction business.

The company's standalone credit strength is further underpinned by its robust order backlog of RMB610 billion at end-2016, which represented close to three times its 2016 revenue and should support steady revenue growth over the next 2-3 years.

Moody's also expects MCC's adjusted EBITDA margin to remain relatively stable at 9% in the next 12-18 months, underpinned by the company's focus on its profitable construction businesses and real estate development, and on expense- and cost-control measures.

On the other hand, MCC's standalone credit strength is constrained by: (1) its improving but still moderate debt leverage; (2) its exposure to the pressured steel sector; and (3) the execution and financial risks associated with its large E&C and overseas mining projects.

The company has been reducing its leverage since 2013 through improving profitability and reducing debt on the back of a cut in capital expenditure and asset sales. Consequently, MCC's adjusted debt/EBITDA improved to 5.6x in 2016 from 8.6x in 2012.

Moody's expects its adjusted debt/EBITDA to trend towards 4.5x-5.0x over the next 12-18 months, driven by an expected improvement in earnings and lower debt levels stemming from manageable investments and an equity issuance at end-2016, the proceeds of which will likely be used in part to pay down debt. This level of leverage is in line with its Ba2-level standalone credit quality, taking into account its strong business profile.

Moody's has not notched down the issuer rating for subordination risk — despite MCC's status as a holding company — because of the likelihood that the Chinese government or China Minmetals will provide support to MCC through CMGC as the holding company in a distressed situation. This factor improves the position of holding company creditors over operating company creditors.

The stable outlook reflects Moody's expectation that (1) MCC's financial leverage will continue to improve gradually over the next 12-18 months; (2) the forthcoming change in CMGC's shareholder will not materially change the assumption of parental support to MCC; and (3) its ratings would not be downgraded even if the sovereign rating is lowered by one notch.

The rating could be upgraded if: (1) we believe that support from its parent will strengthen; and/or (2) its standalone credit profile significantly improves, underpinned by steady revenue growth, stable profitability and debt reductions, such that adjusted debt/EBITDA stays below 4.0x-4.5x on a sustained basis.

On the other hand, MCC's rating could be downgraded if: (1) there are signs of weakening support from or ties with its parent; and/or (2) its standalone credit profile deteriorates significantly because of a weakening in its order backlog, reduced profitability and/or an increase in debt, as evidenced by adjusted debt/EBITDA staying above 5.5x-6.0x on a sustained basis.

The principal methodology used in these ratings was Construction Industry published in March 2017. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Metallurgical Corporation of China Ltd. is engaged in engineering and construction, property development, equipment manufacturing, and resources development businesses.

Headquartered in Beijing, the company is about 59.18% owned by China Metallurgical Group Corporation, which is a central state-owned enterprise wholly owned by the State Council of China, and supervised by the State-owned Assets Supervision and Administration Commission.

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.

Chenyi Lu
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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