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Rating Action:

Moody's revises outlook on China Baowu Steel's Baa1 ratings to stable

 The document has been translated in other languages

09 Jun 2017

Hong Kong, June 09, 2017 -- Moody's Investors Service has affirmed the Baa1 issuer ratings of China Baowu Steel Group Corporation Limited (Baowu) and its flagship subsidiary, Baoshan Iron & Steel Co., Ltd. (BISC).

Moody's has also affirmed the following ratings:

• Baa2 issuer rating of Baosteel Resources International Company Ltd. (BRIC), a wholly owned subsidiary of Baowu;

• Baa2 senior unsecured rating on the USD bond issued by Baosteel Financing 2015 Pty Ltd., a wholly owned subsidiary of BRIC. The bond is guaranteed by BRIC and supported by Baowu through a keepwell agreement;

• Baa2 senior unsecured rating on the USD and EUR bond issued by Bao-trans Enterprises Limited, a wholly owned subsidiary of BISC. The bond is supported by BISC through a keepwell agreement.

At the same time, Moody's has changed the ratings outlook to stable from negative.

RATINGS RATIONALE

"Baowu's rating affirmation and the change in outlook reflect its distinctive market leadership, large business scale, improved financial profile and substantial financial assets which enhance its financial flexibility," says Franco Leung, a Moody's Vice President and Senior Credit Officer, and the International Lead Analyst for Baowu.

"We expect Baowu to maintain its strong market position, protect its earnings through efficiency gains, and slow down capital spending to preserve its cash and leverage ratios," adds Leung.

Baowu's Baa1 rating combines its standalone credit quality, as reflected in its baseline credit assessment (BCA) of ba1, and Moody's assessment of a high likelihood of extraordinary support from the Chinese government (A1 stable), resulting in a three-notch uplift to the rating.

The company has become China's largest steel company and the second largest globally after its merger with Wuhan Iron & Steel (Group) Co. (WISG) at end-2016. The merger should generate synergies through combined raw material procurement, better capacity utilization and shared distribution channels. Baowu also has strong market shares in value-added steel products.

Baowu's market leadership, rationalization of inefficient capacity and the ramp-up of its state-of-the-art Zhanjiang steel plant will counterbalance the potential price pressure arising from slowing demand, elevated inventory and persistent oversupply in the market.

These factors, combined with the contribution from its new Zhanjiang production base and the closure of about 15.5 million tonnes of inefficient capacity, should enable Baowu to sustain its strong 2016 earnings into 2017 and 2018. The strong rebound in steel prices resulted in a substantial improvement in Baowu earnings in 2016 and mitigated the negative impact from its merger with the financially weaker WISG.

Moody's expects a substantial reduction in Baowu's capital spending after the merger, as it has already completed its Zhanjiang project and has suspended the construction of another large steel plant in Fangchengang. As a result, Baowu will generate free cash flow in the next 2-3 years.

Consequently, Baowu's adjusted debt/EBITDA should remain largely stable at about 5.5x-6.0x in the next 1-2 years. This level of financial leverage is high for its ba1 BCA, but is mitigated by its substantial financial assets. Its cash balance and short-term investments amounted to RMB72 billion, accounting for one third of its reported debt at end-2016. In addition, it has substantial equity stakes in Chinese insurance firms as liquidity reserves.

However, Baowu's rating is constrained by (1) its volatile operating performance, as a result of the cyclicality in the steel industry and volatile raw material prices; (2) the slowdown in demand and persistent oversupply in China; and (3) the challenges in integrating WISG's large steel operations and reducing its legacy debt and excess headcount.

The support assessment is underpinned by: (1) its strategic importance as China's largest steel manufacturer supplying high-quality steel products to major industries, despite the fact that it is predominantly engaged in commercial activities; (2) its piloting role in consolidating the oversupplied domestic steel industry; (3) its full ownership by the State-owned Assets Supervision & Administration Commission (SASAC); and (4) the Chinese government's strong ability to provide support, as reflected by the sovereign's A1 rating.

BISC's Baa1 rating incorporates its standalone credit quality -- which is equivalent to a Baa3 rating level -- and a two-notch uplift based on the high likelihood of extraordinary support from its parent Baowu.

BISC's standalone credit quality reflects its large scale, premium product offerings, efficient production and higher profitability than that of its domestic peers as well as healthy financial leverage.

Moody's expects BISC's leverage -- as measured by adjusted debt/EBITDA -- to increase to about 3.0x over the next 12-18 months after the merger with WISG's core steel operation from 2.2x before the merger in 2016. However, this level of leverage remains in line with its standalone credit profile.

The support assumption for BISC reflects the close linkage between the credit profiles of BISC and Baowu, given that BISC is Baowu's flagship subsidiary and accounts for the majority of the group's revenues, profits and assets. In addition, there is a high level of business integration and management overlap between the two entities.

The Baa2 ratings on BRIC and on the bonds issued by Bao-trans are one notch below their respective parents' ratings, due to the absence of a guarantee from Baowu and BISC, respectively. BRIC's and Bao-trans' ratings are closely linked to those of Baowu and BISC, due to their respective important roles as their parents' platforms for overseas investment (BRIC) and procurement and financing (BRIC and Bao-trans).

The stable rating outlooks for BISC, BRIC and Bao-trans mirror the stable outlook on Baowu's rating.

Baowu's rating could be upgraded if it improves its profitability and cash flow generation absent any material changes in the support assessment, with debt/EBITDA falling below 5.0x and net debt/EBITDA below 3.5x.

Baowu's rating could be downgraded if its overall market position weakens through a loss in market share for its primary product categories, or if adjusted debt/EBITDA remains above 6.5x and net debt/EBITDA rises above 5.0x for a prolonged period.

Moody's would also consider downgrading Baowu if there are signs of weakening government support, or if the government ceases to have a controlling stake in Baowu.

A change in the ratings of BISC, BRIC and BRIC's USD bonds, as well as the bonds issued by Bao-trans would be primarily triggered by a change in Baowu's rating.

The principal methodologies used in rating China Baowu Steel Group Corporation Limited were Global Steel Industry published in October 2012, and Government-Related Issuers published in October 2014. The principal methodology used in rating Baoshan Iron & Steel Co., Ltd. and Bao-trans Enterprises Limited was Global Steel Industry published in October 2012. The principal methodology used in rating Baosteel Resources International Company Ltd. and Baosteel Financing 2015 Pty Ltd. was Global Mining Industry published in August 2014. Please see the Rating Methodologies page on www.moodys.com for a copy of these methodologies.

China Baowu Steel Group Corporation Limited is the world's second largest steel producers by production volume. The company produced about 60 million tons of steel in 2016. Its products include flat and long steel products for various industries. The group's revenues totaled RMB310 billion in 2016. Baowu is fully owned by the SASAC under the State Council of the People's Republic of China. Baowu has a 65.6% stake in its major operating subsidiary, Baoshan Iron & Steel Co., Ltd.

The Local Market analyst for these ratings is Jiming Zou, +86 (21) 2057 4018.

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.

Franco Leung
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

Gary Lau
MD - Corporate Finance
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

No Related Data.
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