Fitch downgrades Shanshui to 'BB-'; on Negative Watch

Fitch downgrades Shanshui to 'BB-'; on Negative Watch
Published: 20 April 2015

Fitch Ratings has downgraded China Shanshui Cement Group Ltd's Long-Term Issuer Default Rating (IDR) and senior unsecured rating to 'BB-' from 'BB'. The ratings have also been placed on Rating Watch Negative.

The downgrade is driven by our view that the current weak cement price in Shanshui's core markets will persist, and affect the company's ability to improve its financial performance. The Rating Watch Negative follows a public announcement that parties related to China Tianrui Group Cement Co Ltd (Tianrui) have purchased a 28.16 per cent stake in Shanshui, a situation that could lead to Shanshui being obliged to repurchase US$400m of its offshore notes, which could weaken its liquidity.

Key rating’s drivers

High leverage to continue
Shanshui's high leverage is unlikely to improve in 2015, based on the continued weak cement prices and sales volumes in1Q15 in Shanshui's major markets. Fitch does not expect Shanshui's leverage ratio to fall below 4x in 2015 in the current market environment. The average sales price (ASP) for cement in Shandong province, Shanshui's core market, declined six per cent YoY to CNY275/t (US$44) in 1Q15 from CNY293/t a year ago. Cement ASP in Liaoning province also declined four per cent YoY to CNY310/t in 1Q15.

Change of control may hurt liquidity
On 15 April 2015, Tianrui announced that its chairman, Li Liufa, and parties acting in concert, had increased their stake in Shanshui to 28.16 per cent. Mr Li is now Shanshui's largest shareholder.

This might trigger the "change-of-control" clause in Shanshui's outstanding US$400m notes due 2016. The clause would require Shanshui to make an offer to repurchase all of its outstanding 2016 notes at 101 per cent of the principal amount plus accrued and unpaid interest within 30 days of the change of control. The company had a cash balance of only CNY1.15bn (US$186m) at end-2014, although it is likely to be able to draw on bank facilities to fund the bond repurchase if needed. However, the repurchase would significantly weaken its financial flexibility.

Tianrui's intention not clear
Tianrui is also a major cement producer and is a key competitor to Shanshui in Liaoning. A coordination of Tianrui and Shanshui's operations in overlapping markets could lead to lower regional price competition. However, it is not clear if Mr Li expects to participate in Shanshui's operations and strategic direction after becoming its largest shareholder.