Hong Kong, May 15, 2020 -- Moody's Investors Service has downgraded Hilong Holding Limited's
corporate family and senior unsecured ratings to B2 from B1.
At the same time, Moody's has changed the outlook on Hilong
to negative from stable.
RATINGS RATIONALE
"The downgrade and negative outlook reflect Hilong's weakening credit
profile amid deeper global economic recession and low oil prices,"
says Chenyi Lu, a Moody's Vice President and Senior Credit Officer.
"Our expectations for a more prolonged, reduced demand for
oil-related products will weaken Hilong's earnings and financial
buffers to an extent that's larger than what we previously assessed,"
adds Lu.
The rapid and widening spread of the coronavirus outbreak, deteriorating
global economic outlook, falling oil prices, and asset price
declines are creating a severe and extensive credit shock across many
sectors, regions and markets. The combined credit effects
of these developments are unprecedented.
More specifically, Hilong's exposure to oilfield equipment
and services businesses, which are linked to volatile global oil
prices, has left it vulnerable to shifts in market sentiment in
these unprecedented operating conditions given its sensitivity to consumer
demand and sentiment.
Moody's expects the company's revenue will decline 8% in 2020 and
recover by 5% in 2021, following a strong growth of 13%
in 2019. This assumption is driven by lower demand for drill pipe
products and oilfield services, as upstream oil and gas companies
cut back on capital spending. Moody's expects Brent oil to
stay at $35/bbl over 2020 before recovering to $45/bbl in
2021.
Nevertheless, Hilong's continued growth momentum for its extended
coating services and line pipe business, which supports the deployment
of China's natural gas network, will offer some business resilience
during industry challenges.
Moody's expects the company's adjusted EBITDA margin will decline to around
21.5%-22.0% over the next 12-18
months from 23.7% in 2019, because of pricing pressures
amid weaker demand.
As a result, Moody's expects Hilong's debt leverage, as measured
by adjusted debt/EBITDA, will increase to 4.6x this year
from 3.8x in 2019. Such level of leverage is higher than
Moody's previous expectation and will reduce the company's
buffer against increasingly challenging operating conditions.
Hilong's liquidity is weak. At the end of 2019, the company
had cash and cash equivalents of RMB783 million and restricted cash of
RMB124 million. These liquidity sources and Moody's expected operating
cash flow of around RMB400 million over the next 12 months are insufficient
to cover its RMB1.7 billion of short-term debt, including
USD165 million of notes due in June 2020, RMB233 million of bills
payable, and the estimated RMB100 million of maintenance capital
expenditure over the same period.
However, this weak liquidity position is mitigated by Hilong's track
record of access to offshore and domestic banks and debt markets,
as well as to the equity capital markets. For instance, Hilong
issued a USD200 million bond in September 2019. At the end of 2019,
the company also had unencumbered fixed assets of RMB3.2 billion,
including its pipe-laying and derrick vessel and drilling rigs,
which could be pledged for financing.
Moody's further expects the company will seek refinancing to address its
remaining USD165 million of bonds maturing in June 2020. Signs
of an inability to execute its refinancing would add to downward rating
pressure.
The rating also takes into account the following environmental,
social and governance (ESG) considerations.
First, the company is exposed to increasingly stringent regulations
for oil and gas operations and access to new resources. However,
Hilong has to date not experienced any major compliance violations related
to air emissions, water discharge or waste disposal.
Second, Moody's regards the coronavirus outbreak as a social
risk under its ESG framework, given the substantial implications
for public health and safety. Today's action reflects the
impact on Hilong of the breadth and severity of the outbreak, and
the broad deterioration in credit quality it has triggered.
Third, on the governance front, the company's ownership is
concentrated in its key shareholder, Jun Zhang, who held a
total 58.7% stake in the company at the end of 2019.
This risk is partially mitigated by the company's track record of good
corporate governance, listed status, and disciplined dividend
policy.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
An upgrade of Hilong's ratings is unlikely over the next 12-18
months, given the negative outlook. The outlook could return
to stable if the company (1) maintains its revenue, earnings and
credit metrics despite challenging operating conditions; (2) improves
its free cash flow generation; and (3) improve its liquidity.
The ratings could be downgraded if (1) its revenue and earnings decline
sharply as a result of the low and volatile oil prices; (2) the strain
on its working capital increases, prompting it to raise a large
amount of debt; (3) its debt leverage rises, such that adjusted
debt/EBITDA exceeds 6.5x on a sustained basis; or (4) its
liquidity position weakens. Signs of an inability to refinance
its upcoming maturities would also add to downward rating pressure.
The principal methodology used in these ratings was Global Oilfield Services
Industry Rating Methodology published in May 2017 and available at https://www.moodys.com/research/Global-Oilfield-Services-Industry-Rating-Methodology--PBC_1062654.
Alternatively, please see the Rating Methodologies page on www.moodys.com
for a copy of this methodology.
Hilong Holding Limited is an integrated oilfield equipment and services
provider. The company's four main businesses are (1) oilfield equipment
manufacturing and services, (2) line pipe technology and services,
(3) oilfield services, and (4) offshore engineering services.
The company listed on the Hong Kong Stock Exchange in 2011. Jun
Zhang, the chairman and founder of the company, is the controlling
shareholder, with a 58.7% equity interest as of the
end of 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.
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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
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
