On April 21, 2016, the press release was corrected as follows: In the 4th paragraph, ‘from stable’ has been changed to ‘from rating under view’. Revised release follows.
Hong Kong, April 19, 2016 -- Moody's Investors Service has downgraded to B2 from Ba3 the corporate
family rating of Yanzhou Coal Mining Co. Ltd.
At the same time, Moody's has downgraded to B2 from Ba3 the
senior unsecured debt ratings of the bonds issued by Yancoal International
Resources Development Co., Ltd and the senior unsecured debt
rating of the perpetual bonds issued by Yancoal International Trading
Co., Limited.
The senior unsecured bonds and the senior unsecured perpetual bonds are
guaranteed by Yanzhou Coal.
Moody's has changed the ratings outlook to negative from rating under view.
This rating actions conclude the rating review initiated on 22 January
2016.
The rating review was triggered by Moody's view that there has been a
fundamental downward shift in the mining sector with the downturn being
deeper and prospects for a recovery extended, resulting in increased
credit risk and weaker metrics for Yanzhou as well as the global mining
sector. Consequently, ratings need to be recalibrated to
reflect expected performance over a more protracted challenging operating
environment.
RATINGS RATIONALE
"The downgrade of Yanzhou Coal's corporate family rating to
B2 reflects the higher financial risk arising from an expected rise in
the company's debt as it increases capital spending over the next
2 years when coal prices will likely remain low," says Dylan
Yeo, a Moody's Analyst.
Moody's estimates that the company will spend RMB6 billion to RMB9
billion per annum in the next 2 years, and such amounts are large
relative to Moody's estimate of annual operating cash flow of RMB2.5
billion to RMB3.0 billion.
As a result, Moody's expects Yanzhou Coal to increase borrowings
which will in turn -- as indicated -- raise its financial
risk. Net debt/EBITDA will exceed 9x over the next 2 years from
6.9x in December 2015.
The expectation of higher spending and debt occurs against the backdrop
of Yanzhou Coal's commitment to continue investing and ramping up
its cost-competitive coal mines in Inner Mongolia and Australia.
"The downgrade is also based on the consideration that Yanzhou Coal's
liquidity position will weaken as its levels of short-term debt
and capital expenditure increase," says Yeo who is also the
Lead Analyst for Yanzhou Coal.
Yanzhou Coal's short-term debt increased to RMB23.9
billion in December 2015 from RMB10.9 billion in December 2014.
Its cash and deposit balances totaled RMB23.6 billion at end-2015
-- and together with internally generated operating cash flow --
will be inadequate to fund its cash needs in 2016.
Moody's also notes a level of refinancing risk.
The company's USD300 million senior unsecured perpetual debt has
a call-able option in June 2016 when interest rates will step-up.
In addition, its USD450 million senior unsecured bond is due May
2017.
However, Moody's believes that the refinancing risk of these
bonds could be partly mitigated by the company's good access to
the bank finance and capital markets in China, by virtue of its
status as a state-owned enterprise (SOE) and significant scale.
In addition, the downgrade reflects the expectation that Yanzhou
Coal will continue to generate low profit margins -- against the
backdrop of low coal prices -- over the next 12 -- 18 months.
Moody's expects EBIT margin will stay low at around 5.5%
over the next two years because average coal prices will decline from
levels seen in 2015, when the margin improved to 9.18%
from 4.64% in 2014 due to cost cuts and a reduction in the
low-margin business of coal purchases from third parties.
Moody's further says that the downgrade reflects Yanzhou Coal's
plan to increase its investments in the finance sector to diversify from
the coal industry.
Such a strategy will increase execution and financial risks because the
company has limited track record of investing and managing such businesses.
It will also keep its debt level high as it has to arrange further funding
for such investments.
Yanzhou Coal's B2 corporate family rating reflects its standalone
credit profile and a two-notch uplift for parental support from
Yankuang Group Corporation Limited (unrated). Yankuang Group is
a large provincial state-owned mining enterprise that accounts
for almost one quarter of total coal production in Shandong. Yankuang
Group is 70%-owned by the Shandong Provincial State-Owned
Assets Supervision and Administration Commission.
The uplift factors in Yanzhou Coal's dominant position and strategic importance
as Yankuang's flagship company and the continued support from the provincial
government to both Yanzhou and Yankuang Group. Yankuang Group has
a track record of providing financial support to Yanzhou Coal.
Yanzhou Coal's underlying credit strength reflects: (1) its high-quality
coal mines, with diversified mining assets in China and Australia,
and good related infrastructure; (2) the competitive costs at its
mines in Shandong; and (3) the company's state-owned status
and significant scale that enable good access to the bank finance and
capital markets in China.
On the other hand, its standalone credit profile also considers
challenges, such as (1) the prolonged weakness in coal prices;
(2) the operating and financial risks from Yancoal Australia (unrated)
which was loss-making from 2013 to 2015; (3) execution and
financial risks from investments in financial institutions; (4) high
debt leverage; and (5) weaker liquidity position.
The negative rating outlook reflects the consideration that Yanzhou Coal's
credit metrics will remain under pressure over the next 12-18 months
due to expected weak coal prices and the company's high capital
expenditures. It also reflects the uncertainty over the timing
and extent of any turnaround of the operating loss position at its subsidiary,
Yancoal Australia, and the future of the current waiver in respect
of certain financial covenant breaches by Yancoal Australia.
Upward rating pressure is limited, given the negative rating outlook.
However, its outlook could return to stable if the company:
(1) improves its liquidity position; and (2) successfully turns around
its Australian operations.
Downward rating pressure could emerge if Yanzhou Coal's liquidity and
credit profile deteriorates due to (1) further substantial increases in
short-term debt; (2) further declines in coal prices or disruptions
in operations; or (3) its failure to turn around its Australian operations
or further obtain waivers for covenant breaches.
Any material reduction in the Yankuang Group's ownership in Yanzhou Coal
would be negative to the ratings.
The principal methodology used in these ratings was Global Mining Industry
published in August 2014. Please see the Ratings Methodologies
page on www.moodys.com for a copy of this methodology.
Yanzhou Coal Mining Co. Ltd. listed on the Shanghai,
Hong Kong and New York stock exchanges in 1998. It is 56.59%-owned
by Yankuang Group Corporation Limited, an SOE that is 70%
owned by the Shandong Provincial State-Owned Assets Supervision
and Administration Commission.
At 31 December 2015, Yanzhou Coal owned and operated 20 coal mines
across China and Australia. It also owned abundant coal resources,
including in China's Shandong and Shanxi provinces, and the Inner
Mongolia Autonomous Region, as well as in the Australian states
of Queensland, New South Wales and Western Australia.
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 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.
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.
Dylan Yeo
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 Yanzhou Coal to B2 from Ba3; outlook negative