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I AGREE
03 Sep 2014
Hong Kong, September 03, 2014 -- Moody's Investors Service has downgraded to Ba2 from Ba1 the corporate
family rating of Yanzhou Coal Mining Co and the senior unsecured debt
rating of Yancoal International Resources Development Co Ltd.
Moody's has also downgraded to Ba2 from Ba1 the rating on the unsecured
perpetual bond issued by Yancoal International Trading Co.,
Ltd. and guaranteed by Yanzhou Coal Mining Co., Ltd.
The ratings outlook is negative.
These actions conclude the review for downgrade initiated on April 1,
2014 for Yanzhou Coal Mining Co and Yancoal International Resources Development
Co Ltd, and June 30, 2014 for Yancoal International Trading
Co., Ltd.
RATINGS RATIONALE
"The downgrades and negative outlook reflect our expectation that
Yanzhou Coal's credit metrics for the next 12 to 18 months will
remain weak for the Ba rating category. The company is unlikely
to deleverage, as it plans to carry out its RMB8 billion capex plan
for 2014 amid a weak coal price environment," says Simon Wong,
a Moody's Vice President and Senior Credit Officer/Manager.
Yanzhou Coal's adjusted debt increased further to RMB66.4
billion as at 30 June 2014, including the newly issued perpetual
debt of RMB1.85 billion, from RMB55.4 billion at end-2013
and RMB41.2 billion at end-2012. While the company's
capex is expected to further decline in 2015, Moody's expects
little improvement in its debt to EBITDA ratio as coal prices will likely
stay weak.
Although the company has substantial cash on hand -- RMB22 billion
as of June 2014 -- its net debt to EBITDA ratio of around
5x-6x and EBIT/interest below 2x for 2014 and 2015 are weak for
the Ba range.
"Yanzhou Coal's Ba2 corporate family rating incorporates a
one-notch uplift based on the strong likelihood of parental support
from Yankuang Group (unrated) in case of financial distress,"
adds Wong, also the Lead Analyst for Yanzhou Coal.
The expected strong support from its parent reflects Yanzhou Coal's
strategic importance as the Group's flagship company, holding
substantially all of the Group's mining assets. Yanzhou Coal
contributes around 70% of Yankuang Group's gross profit and
69% of its total assets. Furthermore, Yanzhou Coal
is a key source of recurring dividend and cash flow for Yankuang.
Yanzhou Coal's standalone profile also reflects the company's (1) high-quality
coal mines, with diversified mining assets in China and Australia,
and good related infrastructure; (2) the competitive level of costs
at its mines in Shandong; (3) long operating track record and compliance
with occupational health and safety requirements; (4) favorable position
in China where demand for coal remains resilient; and (5) good access
to low-cost domestic funding.
The rating considers the ongoing operating losses and financial risks
from ongoing expansion in Australia and ongoing need to seek bank waivers
in respect of certain financial covenants breach by its Australian operations.
Resolving the weakness in the credit metrics of its Australian operations
has been hampered by the slow pace of ramp-ups in production,
due to soft demand and weak coal prices. Furthermore, the
company is exposed to regulatory risks in China and Australia.
Yanzhou Coal's liquidity position is strong. Its cash balance of
RMB22 billion including term deposits as of end June 2014 and undrawn
bank facilities more than covered its short-term debt of RMB14
billion and capital expenditure for the next 12 months of around RMB6
billion-RMB7 billion.
Moody's notes that Yanzhou Coal's secured debt to total assets ratio was
below 15% as at 1H 2014. Furthermore, it has substantial
mining asset and operating cash flow at the holding company level,
mitigating structural subordination risks.
Upward rating pressure is limited given the negative rating outlook.
However, its outlook could revert to stable if: (1) the company
can turn around its Australian operations; (2) coal prices improve
materially; or (3) the company improves its financial profile,
such that net adjusted debt/EBITDA returns to below 5x and EBIT/ interest
is maintained above 2x.
On the other hand, downward rating pressure could emerge if Yanzhou
Coal (1) fails to reduce its debt leverage; (2) fails to turn around
its Australian operation; (3) experiences a material disruption in
its operations due to non-compliance with mining regulations;
or (4) experiences persistent negative free cash flows and its liquidity
weakens.
Indicators for downward rating pressure include its cash balance falling
below 5% of total assets; adjusted net debt/EBITDA continuously
exceeding 5.5x; or EBIT/ interest below 2x.
If the Shandong provincial government's indirect ownership through the
Yankuang Group drops to below 50%, this could also be negative
for Yanzhou Coal's ratings.
The principal methodology used in these ratings was Global Mining Industry
published in August 2014. Please see the Credit Policy page on
www.moodys.com for a copy of this methodology.
Yanzhou Coal Co Ltd was listed in Shanghai, Hong Kong and New York
in 1998. It is 56.52%-owned by the Yankuang
Group, a state-owned enterprise that is wholly owned by the
Shandong Provincial State-Owned Assets Supervision and Administration
Commission.
Yanzhou Coal is one of the top coal mining groups in China. As
of December 31, 2013, Yanzhou owned and operated 20 coal mines
across China and Australia with abundant coal resources, including
Shandong and Shanxi Provinces and the Inner Mongolia Autonomous Region
in China, as well as Queensland, New South Wales and Western
Australia in 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
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rating practices. For ratings issued on a support provider,
this announcement provides certain regulatory disclosures in relation
to the rating action on the support provider and in relation to each particular
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 rating action, and
whose ratings may change as a result of this rating action, the
associated regulatory disclosures will be those of the guarantor entity.
Exceptions to this approach exist for the following disclosures,
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Please see www.moodys.com for any updates on changes to
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Please see the ratings tab on the issuer/entity page on www.moodys.com
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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.
Simon Wong
VP - Sr Credit Officer/Manager
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's ratings to Ba2, outlook negative
No Related Data.
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