Hong Kong, December 03, 2020 -- Moody's Investors Service has downgraded to Caa2 from Caa1 Tianqi Lithium
Corporation's corporate family rating (CFR), and to Caa3 from Caa2
the senior unsecured rating on the bonds issued by Tianqi Finco Co.,
Ltd and guaranteed by Tianqi Lithium.
The ratings outlook remains negative.
In an announcement dated 1 December, Tianqi Lithium stated that
it had on 30 November signed a loan extension agreement with its banks
for a USD1.9 billion term loan facility due 29 November,
extending the maturity to the earlier of 28 December 2020 or the effective
date of an amended loan agreement.
This event constitutes a missed payment default under Moody's definition
as Tianqi Lithium failed to meet its original payment promise and was
granted a maturity extension.
"The downgrade reflects our concern that the absence of a satisfactory
resolution on the term loan restructuring could lower recovery prospects
for creditors," says Gerwin Ho, a Moody's Vice President
and Senior Credit Officer. "The current situation could also
lead to an acceleration of payments relating to the company's other
obligations and impact its operations."
RATINGS RATIONALE
Tianqi Lithium's rating primarily reflects its highly strained capital
structure as a result of its sizeable debt burden, elevated leverage,
weak liquidity and weak financial management.
However, the rating considers the company's solid position in the
lithium chemical industry and good profitability, which are driven
by its supply of low-cost lithium minerals; although these
strengths have been offset by its weak capital structure.
The company's rating is also constrained by its product concentration
in lithium minerals and lithium chemicals, with limited revenue
scale, and exposure to regulatory risks.
Tianqi Lithium's leverage has increased significantly following its acquisition
of a 23.8% stake in Sociedad Quimica y Minera de Chile S.A.
(SQM, Baa1 negative) in December 2018, which brought its total
stake in the company to 25.9%.
Moody's expects Tianqi Lithium's financial leverage — as measured
by total debt to EBITDA and with SQM accounted for on an equity method
basis — will remain elevated above 10x over the next 12 months,
given Moody's expectation of flat EBITDA and continued high debt.
Such high leverage renders the company's capital structure untenable.
The company's flat EBITDA is attributable to muted lithium chemical
prices that continue to reflect Moody's expectation of supply growth
that could hinder cash flow generation and delay deleveraging.
Tianqi Lithium's liquidity remains weak. At 30 September 2020,
the company's cash reserves — including restricted cash —
of RMB1.3 billion were insufficient to cover its short-term
debt of RMB16 billion, including the USD1.9 billion loan
maturity that was due on 29 November.
Environmental, social and governance (ESG) issues are material to
the ratings and were assessed as follows.
The company benefits from global trends to reduce carbon emissions,
because lithium is a core input into the manufacture of electric vehicles.
At the same time, its mining and chemical production operations
are exposed to environmental and safety risks. Nonetheless,
Moody's is not aware of any major environmental or safety incidents.
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 also reflects the impact on Tianqi Lithium
of the breadth and severity of the shock, and the broad deterioration
in credit quality the event has contributed to.
From a governance perspective, Tianqi Lithium's ownership is concentrated
and only a minority of its board consists of independent directors.
Moreover, the company's debt-funded acquisition of a 23.8%
stake in SQM and inability to arrange refinancing to meet its obligations
reflect weak financial management and an aggressive financial policy.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
The negative outlook reflects Moody's concerns over the company's tight
liquidity and ability to arrange timely funding to meet its obligations.
An upgrade is unlikely in the near term, given the negative outlook.
A positive rating action could be considered if the company makes significant
progress on servicing its debt obligations and improves its liquidity
and capital structure, such as a satisfactory restructuring of its
term loan facility.
Moody's could downgrade the ratings if principal losses for Tianqi Lithium's
debt holders are likely to increase.
The principal methodology used in these ratings 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.
Headquartered in Chengdu, Sichuan Province, Tianqi Lithium
Corporation is a leading lithium chemicals producer that mines,
makes and sells lithium minerals and lithium chemicals.
The company owns a 51% stake in the Greenbushes lithium mine in
Western Australia. It also owns a 25.9% stake in
Chilean chemical producer, Sociedad Quimica y Minera de Chile S.A.
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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Gerwin Ho
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service Hong Kong Ltd.
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China (Hong Kong S.A.R.)
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Clement Cheuk Yiu Wong
Associate Managing Director
Corporate Finance Group
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Client Service: 852 3551 3077
Releasing Office:
Moody's Investors Service Hong Kong Ltd.
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