Hong Kong, September 04, 2019 -- Moody's Investors Service has downgraded Tianqi Lithium Corporation's
corporate family rating and the senior unsecured rating on the bonds issued
by Tianqi Finco Co., Ltd and guaranteed by Tianqi Lithium
to Ba3 from Ba2.
The ratings outlook remains negative.
RATINGS RATIONALE
"The downgrades reflect Moody's expectation that Tianqi Lithium's
capital structure will remain weak and its leverage will stay elevated
over the next 12 months, because of weaker operating performance,"
says Gerwin Ho, a Moody's Vice President and Senior Credit Officer.
"These factors position the company in the low Ba ratings category."
"The negative outlook reflects the uncertainty related to Tianqi Lithium's
refinancing plans and weak liquidity position," adds Ho, who
is also Moody's Lead Analyst for Tianqi Lithium.
Tianqi Lithium's leverage increased following its acquisition of a 23.8%
stake in Sociedad Quimica y Minera de Chile S.A. (SQM,
Baa1 stable) in December 2018, which brought its total stake in
the company to 25.9%.
Tianqi Lithium plans to refinance the acquisition loans and reduce its
leverage through equity financing. The company's proposed rights
issue, which was approved by its shareholders in April, and
by the Chinese securities regulator on 30 August, could raise proceeds
of up to RMB7 billion, which Moody's expects would help reduce debt/EBITDA
to about 6.2x in 2019 and 5.2x in 2020, with SQM accounted
for on an equity method basis.
However, the company's ability to complete the proposed rights issue
is still subject to capital market execution and market conditions.
While Tianqi Lithium's revenue fell by 21% year-on-year
in 1H 2019 — amid declining lithium chemical prices — Moody's
expects that the company will grow its revenue over the next 12-18
months, because increased sales volumes will offset lower prices.
At the same time, any greater volatility in lithium chemical prices
than Moody's currently expects could weaken the company's cash flow generation
and delay its deleveraging.
Tianqi Lithium's liquidity is weak. At 30 June 2019, the
company's cash reserves — including restricted cash — of RMB1.8
billion were insufficient to cover its short-term debt of RMB3.2
billion.
Nevertheless, Moody's expects that the company will be able to roll
over its debt with domestic banks, given its profitable operations
and strong market position.
The company also has a track record of access to diversified funding channels,
including onshore debt instruments such as medium-term notes,
and equity fund raising from its listing in Shenzhen.
Tianqi Lithium's Ba3 corporate family rating reflects the positive demand
outlook for lithium chemical products, the company's strong position
in the lithium chemical industry, and its robust profitability,
driven by the improved operating efficiency of its chemical production
facilities in Australia.
On the other hand, the rating is constrained by Tianqi Lithium's
product concentration in lithium minerals and lithium chemicals,
with limited revenue scale, and exposure to regulatory risks.
Environmental, social and governance issues are material to the
rating outcome and were assessed as follows.
First, the company benefits from global trends to reduce carbon
emissions, because lithium is a core input into the manufacture
of electric vehicles.
Second, its mining and chemical production operations are exposed
to environmental and safety risks.
Third, Tianqi Lithium's ownership is concentrated and only a minority
of its board consists of independent directors. Moreover,
the company's acquisition of a 23.8% stake in SQM hints
at an aggressive financial policy.
The senior unsecured rating is exposed to legal and structural subordination,
because a substantial portion of the liabilities are at the operating
company level and there is secured lending related to the acquisition
financing. Downward pressure on the rating could emerge,
if the company does not succeed in refinancing all or part of the acquisition
loan through non-debt financing.
The outlook on Tianqi Lithium's ratings could return to stable,
if the company executes its refinancing plan, improves its liquidity
position and maintains a strong operating performance, with debt/EBITDA
trending towards 5.0x or below over the next 12 months.
Downward ratings pressure could emerge if the company fails to (1) executes
its refinancing plan, (2) reduce its leverage, such that adjusted
debt/EBITDA fails to trend towards 5.0x over the next 12 months;
or (3) improve its liquidity position or make progress in removing the
legal subordination of unsecured creditors to the acquisition financing.
The principal methodology used in these ratings was Chemical Industry
published in March 2019. 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.
(Baa1 stable).
REGULATORY DISCLOSURES
For ratings issued on a program, series, category/class of
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Gerwin Ho
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service Hong Kong Ltd.
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Clement Cheuk Yiu Wong
Associate Managing Director
Corporate Finance Group
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Client Service: 852 3551 3077
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Moody's Investors Service Hong Kong Ltd.
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