Hong Kong, March 26, 2014 -- Moody's Investors Service has downgraded to B2 from B1 China Fishery Group
Limited's corporate family rating and the senior unsecured rating on notes
issued by its subsidiary -- CFG Investment S.A.C.
The ratings outlook is stable.
This action concludes Moody's review for downgrade initiated on
12 February 2014.
RATINGS RATIONALE
"The downgrade has been prompted by China Fishery's announcement
that it will end its long-term contract supply business in Russia,
which will significantly impact the company's capacity for debt
servicing," says Lina Choi, a Moody's Vice President
and Senior Analyst.
China Fishery has reviewed its business model and has decided not to continue
the arrangements of pre-paying for purchases from the Russian vessels
and financing part of the working capital of the suppliers.
Based upon the business' performance in 2013, Moody's
estimates that the company will lose annual EBITDA of about US$176
million, which accounted for 72% of total EBITDA in 2013.
China Fishery plans to make up the loss through contributions from Copeinca
ASA, which it acquired in 2013.
Moody's estimates that combined, China Fishery Peru and Copeinca
ASA, will generate EBITDA of around US$170 million in 2014
on the expectation that Copeinca ASA recovers its annual Total Allowable
Catch to 5.0-5.5 million tons from 3.1 million
tons in 2013. The Peruvian government decides on the size of the
catch.
"The downgrade is further based on the consideration that China
Fishery's earnings will become mainly reliant on the fish meal business
and will experience a decline in diversity," says Choi,
who is also the Lead Analyst for China Fishery.
The Russian supply business provided diversity and partially mitigated
the earnings volatility from its fish meal business.
Moreover, China Fishery's Russian supply business was more
profitable than its fish meal business. The Russian business'
EBITDA margin was around 45%, while the fish meal business
was 35% in FY2013.
China Fishery will be challenged to find a profitable replacement in the
foreseeable future.
"After factoring in compensation and repayments of accounts receivables
from the Russian suppliers, China Fishery's credit metrics
match a B2 profile," adds Choi.
Moody's expects China Fishery to receive US$80 million compensation
in 2014 and recover accounts receivables of around US$70 million
in 2014. With such cash inflow, China Fishery's credit
metrics -- debt/EBITDA of 4.5x -- 5x and EBITDA/interest
of 3x -- 3.5x -- match a B2 rating level.
"China Fishery's financial flexibility has also fallen following
the conclusion of the US$650 million term and revolving credit
facilities with a bank consortium," says Choi.
While China Fishery has secured refinancing -- stabilizing
its funding structure through a 4-year loan and revolving credit
facilities -- the company has to keep capital expenditure
low. It will also need to comply with the maintenance covenants.
Moody's does not expect the company to have ample room under its
debt leverage covenants. This will limit its financial flexibility.
China Fishery's liquidity position could be vulnerable in the next
12 months as it relies on the payments from its Russian suppliers on compensation
and accounts receivables. Any delay in payments could impact China
Fishery's cash position.
The rating outlook reflects Moody's expectation that China Fishery
will not undertake further acquisitions and will keep capital expenditures
at maintenance levels. At the same time, it will integrate
the operations of China Fishery and Copeinca ASA.
China Fishery's ratings could be under pressure for upgrade if it
successfully integrates Copeinca ASA as evidenced by revenue and EBITDA
growth, and a track record of disciplined expansion.
Credit metrics indicating an upgrade include debt/EBITDA falling to 4x
and EBITDA/interest rising above 4x.
On the other hand, China Fishery could face downward rating pressure
if (i) it suffers deterioration in revenue or liquidity due to a declining
Total Allowable Catch or problems arising from integrating Copeinca ASA;
or (ii) it takes on further debt-funded expansion or acquisitions.
Credit metrics indicating the possibility of a downgrade include debt/EBITDA
above 5.5x -- 6x; or EBITDA/interest below 2.5x.
The principal methodology used in these ratings was the Global Protein
and Agriculture Industry published in May 2013. Please see the
Credit Policy page on www.moodys.com for a copy of this
methodology.
China Fishery Group Ltd is headquartered in Hong Kong and listed in Singapore.
It is engaged in three business segments: (1) the Contract Supply
Business of Alaska pollock -- a species of cod --
in Russia's northern Pacific area, through agreements with suppliers;
(2) the production of Peruvian fish meal and fish oil, and (3) fishing
fleet operations. China Fishery is 46.5% effectively
owned by the Pacific Andes group, through Pacific Andes International
Holdings Ltd (PAIH), a Hong Kong-listed integrated fish and
seafood products processor. The Carlyle Group, a global alternative
asset management firm, holds an 11.1% stake in the
company.
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 rating action on the support provider and in relation to each particular
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 rating action, and
whose ratings may change as a result of this 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
Vice President - Senior 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
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
Moody's downgrades China Fishery to B2; outlook stable
