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Rating Action:

Moody's downgrades Century Sunshine Group Holdings Limited to B3; changes outlook to negative

15 May 2020

Hong Kong, May 15, 2020 -- Moody's Investors Service has downgraded Century Sunshine Group Holdings Limited's corporate family rating (CFR) to B3 from B2.

At the same time, Moody's has changed the outlook on the rating to negative from stable.

RATINGS RATIONALE

"The downgrade and change in outlook to negative reflect Century Sunshine's heightened refinancing risk, given its upcoming debt maturities, weak liquidity profile, and limited progress on its refinancing plans," says Shawn Xiong, a Moody's Assistant Vice President and Analyst.

Century Sunshine's refinancing risk has increased as it needs to address a large amount of upcoming debt maturities before the end of 2020, including SGD101.75 million of offshore senior unsecured notes due 3 July 2020. The company's total short-term debt was HKD1.69 billion at the end of 2019, including reolving facilities.

Century Sunshine's liquidity position is weak. At the end of December 2019, its cash balance of around HKD833 million with around HKD785 million unrestricted, along with Moody's forecast of HKD300 million-HKD400 million of cash flow from operations, will be insufficient to cover short-term debt maturities and estimated reduced capital spending of HKD120 million over the next 12 months.

The company has a history of rolling over its bank borrowings and reported unencumbered assets of around 85% as of 31 December 2019. However, market uncertainties could potentially increase the difficulties of the company's refinancing tasks.

Given its current weak liquidity position, Moody's expects Century Sunshine's recently proposed issuance of HKD300 million of convertible bonds will be an important source of cash flow in the redemption of the upcoming SGD101.75 million senior unsecured notes due July 2020.

The proposed transaction is subject to the approval of independent shareholders at an extraordinary general meeting and approval from the Securities and Futures Commission of Hong Kong for a "whitewash" waiver for Century Sunshine's chairman making a mandatory takeover offer as his shareholding with his concerted parties will increase to 52.76% from 36.25% upon conversion of the bonds.

However, the company recently filed for a delay in dispatch of the circular in relation to the above approvals, which means the circular will likely be dispatched on or before 22 May 2020 to its shareholders.

Failure to complete the proposed transaction at all or on time will further challenge the company's ability to redeem its SGD101.75 million senior unsecured notes.

Moody's expects Century Sunshine's production volume and revenue to decline by 5%-10% for 2020 due to disruptions caused by the coronavirus outbreak, before recovering in 2021. At the same time, Moody's expects the company's margin to remain relatively stable as the increase proportion of higher-margined organic fertilizers in its product mix will offset the effects from the expected decline in revenue. As such, Moody's expects the company's leverage -- as measured by adjusted debt/EBITDA -- to increase slightly to 2.0x-2.5x over the next 12 months.

Century Sunshine's B3 corporate family rating reflects the company's long track record in the organic fertilizer industry, good profitability and moderate debt leverage.

On the other hand, the rating is constrained by Century Sunshine's developing scale in competitive markets and weak liquidity position.

From an environmental, social and governance (ESG) perspective, the rating incorporates the following considerations.

Firstly, Century Sunshine's chemical fertilizer and magnesium mining operations are exposed to high environmental and safety risk. However, the company has implemented a series of measures to improve its operations to meet tightening environmental standards as the Government of China (A1 stable) increasingly focuses on environmental protection.

Secondly, social risks for commodity chemical companies are viewed as high risk. Health and safety and end market perception are the greatest risks for commodity chemical producers due to the presence or use of potentially hazardous materials. Century Sunshine has been improving its processes and safety standards to mitigate such risks and its operations have not encountered material safety issues in recent years.

Thirdly, Century Sunshine's ownership is concentrated in its key shareholder, Mr. Chi Wen Fu, who held a total 34.75% stake in the company as of the end of 2019. This risk is partially mitigated by the company's track record of good corporate governance, its listed status and the presence of three independent board directors.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATING

An upgrade is unlikely in the near term, given the negative outlook. However, the outlook could return to stable if the company successfully refinances its upcoming debt maturities, including the SGD101.75 million senior unsecured notes.

The rating could be downgraded if Century Sunshine fails to meet its payment obligations.

The principal methodology used in this rating was Chemical Industry published in March 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1152388. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Listed in Hong Kong in 2004, Century Sunshine Group Holdings Limited manufactures and sells fertilizers, including the general, ecological and functional varieties. The company is also engaged in magnesium mining and magnesium alloy production through Rare Earth Magnesium Technology Group Holdings Limited, its Hong Kong main-board listed, 72.4%-owned subsidiary as of the end of December 2019.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security 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.

The rating has been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These rating is solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

Moody's considers a rated entity or its agent(s) to be participating when it maintains an overall relationship with Moody's. Unless noted in the Regulatory Disclosures as a Non-Participating Entity, the rated entity is participating and the rated entity or its agent(s) generally provides Moody's with information for the purposes of its ratings process. Please refer to www.moodys.com for the Regulatory Disclosures for each credit rating action under the ratings tab on the issuer/entity page and for details of Moody's Policy for Designating Non-Participating Rated Entities.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

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.

Shawn Xiong
Asst Vice President - Analyst
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

Clement Cheuk Yiu Wong
Associate Managing Director
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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