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April 29 (Reuters) - (The following statement was released by the rating agency)
Fitch Ratings has assigned Sinochem Offshore Capital Company Limited’s (Sinochem Offshore) USD500m 3.25% notes due 2019 a final ‘A-’ rating. The final rating is in line with the expected rating assigned on 22 April 2014 and follows the receipt of final documents conforming to information already received.
Sinochem Offshore is a wholly owned subsidiary of Sinochem Hong Kong (Group) Company Limited (Sinochem HK; A-/Stable), which is providing an unconditional and irrevocable guarantee for the US dollar notes issued under Sinochem Offshore’s medium-term note programme. The US dollar notes are rated at the same level as Sinochem HK’s senior unsecured rating to reflect this guarantee.
Strong State Linkage: Sinochem HK’s parent, Sinochem Group (Sinochem), has strong linkage to the Chinese state (A+/Stable) due to the importance of its agrochemical operations, especially in seeds. The group also exhibits strong state linkages in its rubber and other chemical operations. According to Sinochem HK, the proportion of its long-term assets in the strategic agrochemical and chemical sectors is 30%. This does not include its oil and gas assets, including its contribution to the country’s strategic reserves, which account for more than 30% of the company’s assets.
Role in Agricultural Modernisation: Sinochem’s agrochemical operations are the only horizontally and vertically integrated ones in China, with market coverage of 95%. Soil enrichment, farmers’ skill development and education, and bio-tech R&D in agrochemicals are all essential tasks performed by Sinochem on a quasi-commercial basis in conjunction with the Ministry of Agriculture to meet the primary state objective of achieving and maintaining a certain level of food production self-sufficiency.
Past Investments Yielding Results: Fitch expects Sinochem HK’s credit metrics to improve in 2014, but this is sensitive to changes in global oil prices and the new investments that Sinochem HK continues to make. Sinochem HK’s large investments in oil fields and property undertaken by its Hong Kong-listed subsidiary Franshion Properties (China) Limited (Franshion; BBB-/Stable) are yielding results that support the improvement in Sinochem HK’s credit metrics. Its leverage, as measured by the net debt/EBITDAR ratio, fell to 3.7x in 2013 from 4.0x in 2012 and 6.0x in 2011. Sinochem HK’s 2013 EBITDA rose by HKD1.1bn even though Hong Kong-listed fertiliser subsidiary, Sinofert Holdings Limited, suffered a CNY1.1bn fall in its EBITDA in 2013.
Group Leverage to Fall: Sinochem’s leverage is expected to fall in 2014 because capex growth will slow after the completion of the Quanzhou refinery in 2013 and the refinery will start to contribute to earnings from 2014. Although Sinochem’s EBITDA improved in 2013, due mostly to the stronger performance from Sinochem HK, its net debt increased by 10% to CNY98.3bn, mainly because it had to finance capex for the Quanzhou refinery. This drove 2013 leverage higher to 6.2x from 6.0x in 2012.
Positive: Future developments that may, individually or collectively, lead to positive rating action include:
- Positive rating action on the Chinese sovereign
- Strengthening linkages between Sinochem and the Chinese sovereign
Negative: Future developments that may, individually or collectively, lead to negative rating action include:
- Negative rating action on the Chinese sovereign
- Weakening linkages between Sinochem HK and Sinochem
- Weakening linkages between Sinochem and the Chinese sovereign