Fitch Ratings has affirmed China Shanshui Cement Group Limited's (Shanshui) Long-Term Issuer Default Rating (IDR) and senior unsecured ratings of 'B+'. The agency has also put the rating on Negative Watch to reflect the possibility of Shanshui running into insolvency in the event that it is forced to redeem the US$500m 7.5 per cent senior notes due 2020 (2020 notes) if its chairman Zhang Bin is removed or the majority of its board members is changed.
This follows the announcement on 19 June 2015 that the company has received a requisition notice from some shareholders (owning 10.07 per cent of the company) for an extraordinary general meeting (EGM) to (1) remove all but one existing non-executive director (including the chairman) and (2) appoint to the board seven new directors, most of them carrying out executive duties in China Tianrui Group Cement Company Limited (Tianrui). These key management changes may result in a downgrade of multiple notches of Shanshui's ratings to a level below 'B-'. To change the chairman, more than 50 per cent of Shanshui's shareholders' votes are required.
Key rating's drivers
Inadequate Liquidity to Redeem All Bonds: Based on the preliminary assessment by Shanshui, the proposed removal of directors including the removal of Mr Zhang Bin as chairman, would trigger the change of control (CoC) event under the 2020 notes. It would also lead to the company being required to make an offer to repurchase all outstanding notes (including both the 2016 notes and the 2020 notes) with a total amount of over US$921m within 30 days. Shanshui believes that it would not have enough cash to complete these redemptions within the limited timeframe and will result in its default.
EGM result uncertain
The outcome of the EGM is uncertain as it is initiated by the largest shareholder Tianrui with 28.16 per cent ownership. Tianrui will need support from either one of the other two major shareholders - Taiwan's Asia Cement Corporation (ACC, 20.9 per cent) and CNBM (16.67 per cent) and the minority shareholders to achieve its intended outcome. As the proposed outcome may harm shareholders' interests if this leads to Shanshui's insolvency, it is not clear if Tianrui can find support for its proposal. Fitch believes ACC and CNBM are in a position to protect their investments in Shanshui if maintaining its operations is aligned with their business interests.
China Shanshui Investment which owns 25.09 per cent of Shanshui is 38.45 per cent owned by Shanshui's executive director Mr Zhang Caikui (the father of Mr Zhang Bin, chairman and executive director), 43.29 per cent kept by receivers, and 18.26 per cent owned by minorities. As the receivers do not have the rights to alter the composition of Shanshui's board of directors, China Shanshui Investment will likely not support Tianrui's proposed change of board members.
Business fundamentals remain strong
Shanshui's ratings are supported by its business, which continues to operate and generate cash. Its business, which generates a 19.9 per cent EBITDA margin, holds a leading market position in Shandong province. Fitch's recovery analysis indicates that the replacement value of Shanshui's production facilities that totalled around CNY27bn can cover 100 per cent of its onshore and offshore debt.
Fitch's key assumptions within our rating case for the issuer include:
• Average selling prices of cement in Shanshui's main markets do not improve
• Total capex (including acquisitions) between 2015-2017 no higher than CNY3bn
• The company is able to roll over short-term debt.
Rating sensitivities – negative
Future developments that may, individually or collectively, lead to negative rating action include:
• the EGM is called and voted to remove the chairman resulting in a forced redemption of the 2020 notes.
Rating sensitivities – positive
Future developments that may, individually or collectively, lead to the rating watch being removed, and Stable Outlook being assigned include:
• The EGM does not proceed or the chairman is not removed and no other conditions resulting in a forced redemption of the 2020 notes exist, for example no shareholders own more than 30 per cent
• No significant increase in working capital funding and/or banks continue to extend debt to the company
• The employee dispute with Mr Zhang does not result in material deterioration in the company's operations