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