Hong Kong, August 02, 2017 -- Moody's Investors Service has changed to stable from negative the
outlook on COFCO (Hong Kong) Limited's (COFCO HK) A3 issuer rating,
as well as the A3 rating on the backed senior unsecured bonds issued by
Prosperous Ray Limited and guaranteed by COFCO HK.
At the same time, Moody's has affirmed all ratings.
RATINGS RATIONALE
"The change in outlook to stable reflects COFCO HK's improved
leverage and our expectation that the company can keep its adjusted net
debt/EBITDA at around 6x in 2017, due to its focus on efficiency
and profitability, and implementation of state-owned enterprise
reforms," says Lina Choi, a Moody's Vice President and
Senior Credit Officer, and also the International Lead Analyst for
COFCO HK.
COFCO HK reduced its adjusted net debt/EBITDA to 6x in 2016 from around
9x in 2015. The improvement was mainly driven by the stronger EBITDA
of its key underlying subsidiaries, including China Agri-Industries
Holdings Limited and Joy City Property Holdings.
COFCO HK also reduced its debt by around HKD12 billion or 10% of
total adjusted debt in 2016 from the level at end-2015, due
to the disposal of assets, IPO of its subsidiary, COFCO Meat
Holdings Limited, implementation of mixed ownership reform at CPMC
Holdings Limited, as well as stronger cash flow from operations.
Moody's expects that COFCO HK's EBITDA will increase by 15%-20%
(about HKD1.5-HKD2.0 billion) in 2017 versus 2016,
likely driven by continued profit improvement at China Agri and Joy City,
and a reduction of losses at Nidera Capita B.V., because
COFCO Group has strengthened oversight on Nidera's financial and
risk management and cleaned up historical losses.
COFCO HK's A3 issuer rating combines its standalone credit strength —
which is equivalent to the Ba1 rating level — and a four-notch
uplift, based on Moody's expectation that the company will receive
a high level of support from its parent, COFCO Group, in a
situation of financial distress.
The standalone credit strength of COFCO HK is underpinned by its diversified
business portfolio, strong market positions in key areas,
and likely stable cash flow from its investment property and food-related
investment property businesses.
At the same time, the standalone credit strength is constrained
by the company's exposure to volatile commodity prices, execution
risks associated with its acquisition of COFCO Agri Limited and Nidera,
and high leverage.
"COFCO Group's stronger credit profile also supports COFCO
HK's credit quality," says Kai Hu, a Moody's Senior
Vice President and also the Local Market Analyst for COFCO HK.
"We expect that COFCO Group's adjusted net debt/EBITDA —
which fell to around 4x at end-2016 from around 5x at end-2015
— will remain at around 4.0-4.5x during the
next 1-2 years."
The credit profiles of COFCO HK and COFCO Group are closely linked.
COFCO HK, which is COFCO Group's sole platform in integrating
the group's offshore businesses and assets, accounted for
around 80% and 38% COFCO Group's revenue and adjusted
EBITDA in 2016. The two companies have joint management teams and
share the same chief executive officer.
Moreover, COFCO Group has a track record of capital injections into
COFCO HK. Consequently, Moody's assessment of COFCO HK's
standalone credit strength considers the operating and financial profile
of COFCO Group.
Moody's assessment of strong parental support reflects COFCO HK's strategic
importance to the group, the close linkages between the two companies,
and COFCO Group's track record of providing support to COFCO HK.
Moody's also expects that the Chinese government (A1 stable) will provide
support to COFCO Group and indirectly to COFCO HK in times of financial
stress, because COFCO Group is 100% owned by the central
government and both COFCO Group and COFCO HK play an important role in
securing agriculture products and improving food safety in the country.
The stable ratings outlook reflects the fact that COFCO HK and COFCO Group
can maintain their current leverage level, continue to improve the
performance of their underlying businesses, and enforce strong risk
management over their commodity trading businesses.
Upward ratings pressure could emerge, if COFCO HK and COFCO Group:
1) continue the improvement on their business performance; 2) prudently
manage their growth and business risk in commodity trading, and
3) improve their financial profiles.
The credit metrics that Moody's would consider for an upgrade include:
an adjusted net debt/EBITDA below 4x for COFCO HK and 3x for COFCO Group,
on a sustained basis.
Downward ratings pressure could emerge if COFCO HK and COFCO Group:
1) engage in further large debt-funded acquisitions; and/or
(2)demonstrate an increased business risk profile because of their commodity
trading business.
The credit metrics that Moody's would consider for a downgrade include
COFCO HK's or COFCO Group's adjusted net debt/EBITDA rising
above 6.5x and 5.0x respectively over a prolonged period.
A material weakening of support from COFCO Group to COFCO HK or from the
Chinese government to COFCO Group and COFCO HK could also trigger negative
rating actions.
The principal methodology used in these ratings was Trading Companies
published in June 2016. Please see the Rating Methodologies page
on www.moodys.com for a copy of this methodology.
COFCO (Hong Kong) Limited is a wholly owned offshore subsidiary of COFCO
Group.
COFCO (Hong Kong) Limited holds the group's important assets, including
stakes in nine listed companies. The firm's main businesses include
agricultural products trading and processing, biofuels, the
manufacturing and packaging of food, logistics and storage,
and property investment and development. The company reported revenues
of HKD363 billion in 2016.
COFCO Group is 100% owned by the Government of China (A1 stable).
COFCO Group is the largest supplier of agricultural and food products
in the country by sales revenue, and serves as one of China's main
importing and exporting channels for bulk agricultural products.
The Local Market analyst for these ratings is Kai Hu, +86 (21)
2057-4012.
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.
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.
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.
Lina Choi
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
