Hong Kong, November 22, 2016 -- Moody's Investors Service has confirmed COFCO (Hong Kong) Limited's
(COFCO HK) A3 issuer rating, as well as the A3 rating on the senior
unsecured bonds issued by Prosperous Ray Limited and guaranteed by COFCO
HK.
The ratings outlook is negative.
This confirmation concludes Moody's review of COFCO HK's ratings
initiated on 26 August 2016, following COFCO HK's announcement
on 23 August 2016 that it intended to acquire the remaining 49%
stake in Nidera BV (unrated).
RATINGS RATIONALE
The confirmation of COFCO HK's ratings considers the following credit
factors and expectations.
(1) The continued close linkages between COFCO HK and its parent COFCO
Corporation (COFCO Group, unrated). COFCO HK accounted for
around 74% and 62% of COFCO Group's total revenues and total
assets, respectively, as of end-2015. 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 issuer rating considers the operating and financial
profile of COFCO Group;
(2) Moody's expectation of ongoing high levels of oversight over and support
for COFCO Group and COFCO HK from the Chinese government (Aa3 negative);
and
(3) Moody's expectation that COFCO HK and COFCO Group's performance
will improve after the Nidera BV (unrated) acquisition.
Both COFCO HK and COFCO Group lowered their debt leverage in 1H 2016.
COFCO HK's adjusted net debt/EBITDA (key adjustments include the
carving out of debt funding the government's grain reserve and the
full consolidation of Nidera BV and COFCO Agri Limited) was 8.2x
on an annualized basis as of end-June 2016, compared with
9.4x at end-2015. COFCO Group's adjusted net
debt/EBITDA also improved to 4.7x on an annualized basis as of
end-September 2016 from 6.5x at end-2015.
The improved debt leverage in 1H 2016 was the result of COFCO Agri Limited's
(unrated) stronger performance compared to 1H 2015, as well as stronger
profits from COFCO Group's onshore businesses. Rising commodity
prices, synergies from the integration of COFCO HK and COFCO Agri
Limited, and cost cutting measures also contributed to improved
EBITDA.
Moody's expects COFCO HK and COFCO Group will continue to implement
measures to improve their risk management, achieve asset rationalizations,
improve efficiency and newly acquired overseas business. As a result,
the adjusted net debt/EBITDA ratios of COFCO HK and COFCO Group should
further improve by end-2017 to levels that support the A3 rating.
COFCO HK's A3 issuer rating combines its standalone credit strength,
and a four-notch uplift based on Moody's expectation that
the company will receive a high level of support from COFCO Group in a
situation of financial distress.
Moody's assessment of strong parental support reflects COFCO HK's
strategic importance to the group, close linkages between the two
companies, and COFCO Group's track record of providing support to
COFCO HK.
Moody's also expects China's central government will provide support
to COFCO Group and indirectly to COFCO HK in times of financial stress.
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 standalone credit strength is underpinned by the Group's diversified
business portfolio, strong market positions in key areas,
and expected stable cash flows from its food, packaging and investment
property businesses.
At the same time, the standalone credit strength is constrained
by the Group's increased exposure to commodity prices, execution
risks associated with its fast expansion, and weakened financial
profile following its acquisition of COFCO Agri Limited and Nidera BV.
The negative outlook reflects the high debt leverage of COFCO HK,
execution risk associated with integrating COFCO Agri Limited and Nidera
BV, and the potential for negative impact on the companies'
financial profiles from the volatile commodity markets
Rating upgrade pressure is not likely given the negative outlook.
Nevertheless, the rating outlook could return to stable if COFCO
HK and COFCO Group show sustained stability in their profitability and
improved debt leverage.
Credit metrics that Moody's would consider in changing the outlook to
stable include a gradual improvement in COFCO Group's adjusted net debt/EBITDA
to below 5.0-5.5x and COFCO HK's adjusted net
debt/EBITDA to below 6.0x by end-2017.
On the other hand, COFCO HK's rating could be downgraded if:
(1) COFCO HK's or COFCO Group's adjusted net debt/EBITDA fails
to trend below 6.5x and 6.0x respectively by end 2017;
(2) the Group engages in further large debt-funded acquisitions;
and/or (3) the company demonstrates an increased business risk profile
from its commodity trading business.
Moody's would also consider downgrading COFCO HK if there is evidence
of weakening parental support from COFCO Group or weakening indirect government
support through the parent.
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 HK 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 HKD369
billion in 2015.
COFCO Group is 100% owned by the Government of China (Aa3 negative).
COFCO Group is the largest supplier of agricultural and food products
in the country in terms of sales revenue, and serves as one of China's
main importing and exporting channels for bulk agricultural products.
The Local Market analyst for this rating 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.
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.
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
SUBSCRIBERS: (852) 3551-3077
Gary Lau
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (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
SUBSCRIBERS: (852) 3551-3077