Hong Kong, September 10, 2019 -- Moody's Investors Service has placed on review for upgrade Hilong Holding
Limited's B1 corporate family and senior unsecured ratings.
At the same time, Moody's has assigned a B1 rating to the
proposed senior unsecured notes to be issued by Hilong, and has
placed the rating on review for upgrade.
The outlook was changed to ratings under review for upgrade from stable
Hilong will use the proceeds from the proposed notes to refinance existing
debt, and for working capital and general corporate purposes.
RATINGS RATIONALE
"The review for upgrade mainly reflects the company's strengthened
business profile, and the improvement in its debt leverage for the
12 months ended June 2019 to a level that exceeds our earlier expectations,"
says Chenyi Lu, a Moody's Vice President and Senior Credit Officer.
"The review for upgrade also reflects the company's prudent
financial management and its proposed refinancing plan ahead of its upcoming
maturities in June 2020," adds Lu.
The review for upgrade will focus on Hilong's ability to sustain
the improvements in its business profile and credit metrics against the
backdrop of industry volatility, as well as its ability to improve
its liquidity and debt maturity profile.
Hilong's debt leverage, as measured by adjusted debt/EBITDA,
improved to 3.6x for the 12 months ended June 2019 from 3.9x
in 2018, mainly because of continued earnings improvements.
Moody's expects Hilong's debt leverage will further improve
to 3.0x over the next 12-18 months. Such a level
of leverage would position the company in the Ba range and provide it
with a buffer against its working capital needs and potential industry
volatility.
The company has expanded its scale over the last two years. It
posted strong 23.6% year-on-year revenue growth
in 1H 2019, mainly driven by growth in its oilfield equipment manufacturing
and services (up 27.0%) and oilfield services (up 50.6%)
businesses.
Moody's projects the company's revenue will grow 12% in 2019
and 9% in 2020, mainly driven by (1) continued strong demand
for its oil field equipment manufacturing and services, especially
in China; (2) growing business traction in its concrete weighted
coating services and pipeline inspection services; (3) the company's
growing customer base; and (4) its expanded oil and gas-field
services offerings.
Moody's expects the company's adjusted EBITDA margin will
improve slightly to around 26.0%-26.5%
over the next 12-18 months from 24.2% for the 12
months ended June 2019, as the company continues to focus on cost
and expense controls, and increases operating efficiencies with
its higher revenue.
Hilong's liquidity profile is modest. At the end of June 2019,
the company had cash and cash equivalents of RMB625 million and restricted
cash of RMB191 million. These liquidity sources and Moody's
expected operating cash flows of around RMB450-500 million over
the next 12 months are insufficient to cover its RMB2.9 billion
of short-term debt, including the USD310 million notes due
in June 2020, RMB221 million of bills payable, and estimated
RMB150 million of maintenance capital expenditure over the same period.
However, Hilong's liquidity will improve if it completes the
refinancing on satisfactory terms and conditions. A failure to
complete the proposed refinancing plan in a timely manner will likely
result in downward rating pressure, because the company's refinancing
risk would rise toward the maturities of the 2020 notes.
On 10 September 2019, Hilong announced a tender offer for any and
all outstanding existing notes due June 2020 with an outstanding principal
amount of about USD310 million. The tender offer will expire on
17 September 2019.
Under the offer, for each USD1,000 principal amount of the
outstanding existing notes, the holders will receive USD1,003.75
in aggregate principal amount of the proposed notes and capitalized interest
in the form of the proposed notes.
Moody's does not regard this tender offer as a distressed exchange --
which is considered as a default event under Moody's definition --
because the holders will not incur economic loss as the tender offer is
above the par value of the existing notes.
Moody's review will conclude once the company maintains its business and
financial resilience through short-term industry volatility,
and the company's liquidity improves upon substantial completion
of the transaction on satisfactory terms and conditions.
The rating also takes into account the following environmental,
social and governance (ESG) considerations.
Firstly, the company is exposed to increasingly stringent regulations
for oil and gas operations and access to new resources. However,
Hilong has to date not experienced any major compliance violations related
to air emissions, water discharge or waste disposal.
Secondly, on the governance front, the company's ownership
is concentrated in its key shareholder, Jun Zhang, who held
a total 58.7% stake in the company at the end of June 2019.
This risk is partially mitigated by the company's track record of
good corporate governance, its regulatory status, and the
presence of three independent board directors.
The principal methodology used in these ratings was Global Oilfield Services
Industry Rating Methodology published in May 2017. Please see the
Rating Methodologies page on www.moodys.com for a copy of
this methodology.
Hilong Holding Limited is an integrated oilfield equipment and services
provider. The company's four main businesses are (1) oilfield equipment
manufacturing and services, (2) line pipe technology and services,
(3) oilfield services, and (4) offshore engineering services.
The company listed on the Hong Kong Stock Exchange in 2011. Jun
Zhang, the chairman and founder of the company, is the controlling
shareholder, with a 58.7% equity interest as of the
end of June 2019.
REGULATORY DISCLOSURES
For ratings issued on a program, series, category/class of
debt or security this announcement provides certain regulatory disclosures
in relation to each rating of a subsequently issued bond or note of the
same series, category/class of debt, security 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.
Moody's considers a rated entity or its agent(s) to be participating
when it maintains an overall relationship with Moody's. Unless
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the rated entity is participating and the rated entity or its agent(s)
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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
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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.
Chenyi Lu
VP - Senior Credit Officer
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
Client Service: 852 3551 3077
Clement Cheuk Yiu Wong
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 852 3758 1350
Client Service: 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
Client Service: 852 3551 3077
