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Rating Action:

Moody's downgrades Yanzhou Coal to B2 from Ba3; outlook negative

 The document has been translated in other languages

19 Apr 2016

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.

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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
No Related Data.
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