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Rating Action:

Moody's upgrades China Baowu Steel; outlook stable

 The document has been translated in other languages

05 Nov 2018

Hong Kong, November 05, 2018 -- Moody's Investors Service has upgraded to A3 from Baa1 the issuer ratings of China Baowu Steel Group Corporation Limited (Baowu) and its key listed subsidiary, Baoshan Iron & Steel Co., Ltd. (BISC).

Moody's has also upgraded the following ratings:

• The issuer rating of Baosteel Resources International Company Ltd. (BRIC), a wholly owned subsidiary of Baowu, to Baa1 from Baa2;

• The senior unsecured rating on the USD bond issued by Baosteel Financing 2015 Pty Ltd., a wholly owned subsidiary of BRIC, to Baa1 from Baa2. The bond is guaranteed by BRIC and supported by Baowu through a keepwell agreement;

• The senior unsecured rating on the USD bond issued by Bao-trans Enterprises Limited, a wholly owned subsidiary of BISC, to Baa1 from Baa2. The bond is supported by BISC through a keepwell agreement.

The outlook on all ratings is stable.

RATINGS RATIONALE

The upgrade of Baowu's ratings primarily reflects the improvement in its operating performance and financial profile, which Moody's expects the company will sustain with leverage -- as measured by adjusted debt/EBITDA -- remaining around 3.0x in 2018 and 2019. This level of leverage is much lower than the 5.7x recorded in 2016.

The improvement in the company's performance is underpinned by (1) improved conditions in China's steel sector as the government continues its supply-side reform, (2) cost savings and capital expenditure cuts, (3) the synergies it has realized from its merger with Wuhan Iron & Steel (Group) Co. (WISG).

Baowu has become the largest steel company in China and the second largest globally since its merger with WISG at the end of 2016. The merger has generated synergies through combined raw material procurement, better capacity utilization and shared distribution channels.

Baowu achieved a strong performance in 2017 and 1H 2018. Its adjusted EBIT increased by 199% and 53% in 2017 and 1H 2018 respectively, mainly benefiting from higher steel prices.

Moody's expects continued capacity reductions and enhanced environmental protection measures -- which will also reduce production capacity, particularly at old mills -- will moderate the effects of likely weaker demand for steel in 2019. The capacity reductions will also moderate an expected sharp decline in steel prices.

Under Moody's assumption of 5% lower average steel selling price for Baowu in 2019 versus 2018, Moody's expects that Baowu will continue to generate strong cash flow from its operations and that it will be able to cover its estimated capital expenditure of around RMB25 billion, resulting in free cash flow of around RMB20 billion. Moody's also expects Baowu's adjusted debt/EBIDTA and EBIT/interest to stay at around 3.0x and 4.5-5.0x over the next 12-18 months, which is strong for its baa3 BCA.

Baowu's A3 rating combines its baseline credit assessment (BCA) of baa3, and Moody's assessment of a high likelihood of support from and high level of dependence on the Government of China (A1 stable), which provides a three-notch uplift to the company's final rating.

Moody's assessment of a high level of support for Baowu is underpinned by: (1) its strategic importance as China's largest steel manufacturer supplying high-quality steel products to major industries, and even though 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.

Baowu's standalone credit profile is captured by its BCA of baa3, which primarily reflects its (1) leading market position as China's biggest steelmaker; (2) integrated steel production, with a focus on high-value-added steel products; and (3) good financial flexibility due to its holding of a substantial amount of cash and financial assets.

However, Baowu's BCA is constrained by (1) its high geographical concentration in China; (2) the cyclical nature of the steel industry and volatile raw material prices; (3) potential macro headwinds arising from the US-China trade tension and slower economic growth in China.

Baowu also has a strong liquidity profile, which is supported by its large holdings of cash and marketable securities, and other financial investments, as well as strong cashflow from operations. Moreover, as a central SOE, Baowu has sound access to bank loans and the capital markets.

BISC's A3 rating incorporates its standalone credit quality -- which is equivalent to a Baa2 rating level -- and a two-notch uplift based on the high likelihood of extraordinary support from its parent Baowu.

The assumption of support 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. BISC accounted for 72% of revenue and 47% of assets of Baowu in 2017.

Moody's expects BISC's leverage -- as measured by adjusted debt/EBITDA -- to remain around 1.5x-2.0x over the next 12-18 months, which supports its standalone credit profile of Baa2.

The Baa1 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 outlook of Baowu's ratings reflects Moody's expectation that (1) it will maintain its market position, profitability and continued financial prudence such that its credit profile remains consistent with its BCA; (2) the company's strategic role and leading position in China's steel sector will remain intact. The stable outlook also reflects the stable outlook on the China sovereign rating.

The 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 a material change in the support assessment, with debt/EBITDA falling below 2.0x-2.5x on a sustained basis.

An upgrade of China's sovereign rating to Aa3 would not have an immediate impact on Baowu's final rating under the current level of the policy roles it has unless there is a material improvement in its BCA.

An upgrade of Baowu's rating would likely trigger an upgrade of the ratings of BISC, BRIC and BRIC's USD bonds, as well as the bond issued by Bao-trans, given the close credit linkage.

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 4.5-5.0x 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.

Similarly, a downgrade of Baowu's rating would likely trigger a downgrade of the ratings of BISC, BRIC and BRIC's USD bonds, as well as the bonds issued by Bao-trans.

The principal methodologies used in rating China Baowu Steel Group Corporation Limited were Steel Industry published in September 2017, and Government-Related Issuers published in June 2018. The principal methodology used in rating Baoshan Iron & Steel Co., Ltd., Bao-trans Enterprises Limited and Baosteel Financing 2015 Pty Ltd. was Steel Industry published in September 2017. The principal methodology used in rating Baosteel Resources International Company Ltd. was Mining published in September 2018. 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 producer by production volume. The company produced about 65.4 million tons of steel in 2017. Its products include flat and long steel products for various industries. The group's revenues totaled RMB400 billion in 2017. 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 Kai Hu, +86 (21) 2057-4012

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.

Franco Leung
Associate Managing Director
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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