Fitch Ratings has assigned West China Cement Ltd's (WCC) proposed US dollar senior unsecured notes an expected rating of 'BB-(EXP)'. The notes will be issued by WCC and guaranteed by WCC's existing subsidiaries other than those organised under the laws of China.
Refinancing drives Outlook revision
WCC has US$400m of senior notes due January 2016 and CNY800m of onshore medium-term notes (MTN) due March 2016 that remain outstanding. The company intends to use the proceeds of the proposed notes to partly refinance the US dollar notes, which may be redeemed at 101.875 per cent of the principal amount on or after January 25, 2015, or at 103.75 per cent before that. In addition, WCC has another CNY800m of MTN that it can issue before March 2015 from its CNY1.6bn MTN programme that may be used for refinancing purposes.
Fitch says the 'Negative' Outlook on WCC is driven by the refinancing risk the company faces for its outstanding debt. "This will be resolved once WCC successfully refinances a majority of the debt due in 2016, and the Outlook may be revised back to Stable, if the company maintains its leverage ratio below 3.0x on a sustained basis," the rating's agency highlights.
1H14 performance in Line
Fitch goes on to note that WCC's 1H14 average sales price (ASP) recovered slightly to CNY239/t from CNY233/t in 1H13, and drove gross profit up to CNY51/t in 1H14 from CNY43/t in 1H13. This has offset the slight drop of cement sales volume (7.98Mt in 1H14 from 8.16Mt in 1H13), and supports the company's steady cash flow generation. "We expect WCC's financial leverage (measured by FFO adjusted net leverage) to decrease in 2014 from 3.0x at end-2013," Fitch said.
WCC's total borrowings at 30 June 2014 was CNY4.058bn (end-2013: CNY4.03bn), while gross margin was 19.3 per cent for 1H14 (1H13: 17.6 per cent). Fitch adds that the steady profitability was underpinned by the steady average selling price (ASP) and a six per cent drop in the price of thermal coal, which account for a major part of production cost.
Steady cash flow generation
According to Fitch, WCC's steady cash flow generation is supported by stable demand for cement in Shaanxi, its core market, and the company's addition 3.3Mta of capacity addition in Xinjiang and Guizhou, which will start operating in 2H14. "Solid cement demand in Shaanxi province is supported by existing and new infrastructure construction projects for railways, water conservation and highways. This has offset the lower demand from housing construction activities during 1H14," Fitch states.
Liquidity not a concern
At 30 June 2014, WCC had short-term borrowings of CNY744m and unrestricted cash of CNY615m. Fitch does not see liquidity as a concern for WCC, not only because of its cash and available bank facilities at hand, but also because its fixed assets may be used as collateral for further borrowing.