Standard & Poor's Ratings puts West China Cement on CreditWatch positive

Standard & Poor's Ratings puts West China Cement on CreditWatch positive
Published: 01 December 2015

Standard & Poor's Ratings Services said that it had placed its 'B+' long-term corporate credit rating and 'cnBB' long-term Greater China regional scale rating on West China Cement Ltd (WCC) on CreditWatch with positive implications. At the same time, it placed our 'B+' issue rating and 'cnBB' long-term Greater China regional scale rating on the company's outstanding senior unsecured notes on CreditWatch with positive implications.
 
"We placed the ratings on CreditWatch because we believe that WCC's acquisition of cement assets from Anhui Conch Cement Co Ltd in return for a majority stake could boost WCC's competitive position in Shaanxi province," said Standard & Poor's credit analyst, Jian Cheng. "In addition, the acquisition may improve WCC's profitability through resource sharing and integration of operations."
 
WCC has announced that it will acquire four cement-manufacturing subsidiaries from Anhui Conch for the issuance of CNY4.59bn in new shares. Upon completion of the transaction, Anhui Conch will have at least 51 per cent equity interest in WCC, compared with its current 21.17 per cent. After the acquisition, WCC's  capacity should expand to 39.6Mta from 29.2Mta.
 
S&P believes that WCC will likely become a significant part of Anhui Conch's post-acquisition strategy in Shaanxi and will be meaningfully integrated into the group's operations. The level of integration will depend on the outcome of the mandatory general offer. S&P will assess the support in the context of its
group rating methodology.
 
"The potential acquisition is a major transaction by Anhui Conch and will trigger the general offer threshold. We expect Anhui Conch, which is cash rich, to fund the mandatory general offer from internal sources. The transaction has not yet triggered the change-of-control clause for WCC's outstanding US dollar-denominated senior unsecured notes," the rating's agency notes.
 
Consequently, S&P needs to further clarify with both management teams regarding WCC's capital management, growth strategy, board composition and any change to WCC's existing risk management framework once the transaction is completed. The transaction could take more than three months to be completed due to the general offer. Also, the transaction is subject to shareholder approval at the
company's extraordinary general meeting.
 
S&P aims to resolve or update the CreditWatch placement within the next three months. In resolving the CreditWatch, we it review the transaction once it is settled or close to being settled. It will also assess the likelihood of group support from Anhui Conch, given the potential integration, managerial control, and the impact on WCC's competitive position and leverage/cash flows.
 
"We could raise the rating by at least one notch if we believe WCC will benefit from a meaningful level of support following the acquisition," said Mr Cheng.
 
We could affirm the rating if the transaction does not proceed or in the low likelihood event that we assess that the support from Anhui Conch will be limited.