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March 26 (Reuters) - (The following statement was released by the rating agency)
Fitch Ratings has affirmed China Fishery Group Limited's (China Fishery) Long-Term Issuer Default Rating (IDR) and its senior unsecured rating at 'BB-'. The outlook remains negative. The USD300m senior unsecured notes issued by CFG Investment S.A.C. and guaranteed by China Fishery have also been affirmed at 'BB-'.
The affirmation follows an improvement of China Fishery's business profile after its acquisition of Copeinca ASA (Copeinca, 'B+'/Stable) making it the leading anchovy fishmeal producer in Peru. Its recovery of the prepayments for the long-term supply agreement (LSA) in Russia has also addressed the risk of suffering substantial losses in this investment in the event of negative regulatory influence on its contract supply business.
Risk to its operations remains as the full repayment of the LSA prepayment will only conclude by April 2016. China Fishery's fleet performance has also been erratic since it started operating in 2011. Finally, the outlook can be stabilised only after the company has deleveraged and achieved an adjusted net debt/EBITDAR of below 3.0x.
Strengthened Business Profile: Fitch estimated that the Peruvian fishmeal segment will be contributing close to 80% of China Fishery's EBITDA after the termination of the LSA. The is because the contract supply business will become a spot purchase business with very thin trading margins and this segment used to contribute about 65% of China Fishery's EBITDA. Although the change reduces China Fishery's earnings diversity, it can lessen the uncertainty posed by regulatory changes that may result in substantial losses in this operation. The refocus of China Fishery's operations to Peru is also a positive given the firm demand for fishmeal, which is a staple needed for aquaculture globally.
This is evident in the strong price increases of Peruvian fishmeal and fish oil as a result of significantly lower total allowable catch (TAC) for Peru anchovies for the fishing season starting in November 2012. Prices of Peruvian fishmeal at end-March hit a record USD2,200 per metric ton compared with between USD1,200 and USD1,600 in 2012. As a result China Fishery's H113 EBITDAR margin rose to 45% versus 40% for 2012. For the financial year ending 28 September 2013 (FY13), China Fishery's Peruvian fishmeal segment (excluding Copeinca) only saw a 5% yoy decline in EBITDA versus a 25% drop in revenue.
Leverage Remains High: Fitch expects China Fishery's leverage to exceed 3.0x in FY14 and FY15 following its Copeinca acquisition and the termination of the LSA prepayments. Pro-forma FY13 leverage including Copeinca full-year contribution would have been 4.1x. Following the LSA termination, China Fishery's FY14 leverage may be reduced to below 3.5x (net debt offset by the outstanding LSA repayment) if management persists with deleveraging. China Fishery's ability to generate positive free cash flow of about USD90m from FY15 can help the company reduce its leverage to below 3.0x by FY16.
Negative: Future developments that may, individually or collectively, lead to negative rating action include:
- adjusted net debt/EBITDAR is sustained above 3x even with the full repayment of the LSA prepayments
- the China Fishery fleet operation continues to show volatile performances and suffer losses
- any issues arising to obstruct the full repayment of the LSA prepayments
Positive: The current rating is placed on Negative Outlook. As a result, Fitch's sensitivities do not anticipate developments with a material likelihood, individually or collectively, of leading to a rating upgrade. However, if all the above negative factors do not happen, then the Outlook may revert to Stable