Dagong Global Credit Rating Co., Ltd.
January 25th, 2017
Dagong Global Credit Rating Company Limited (“Dagong”) downgrades the issuer credit rating of Feicheng Mining Group Co., Ltd. (hereinafter referred to as “Feicheng Mining”) from ‘B-’ to ‘CC’, maintains its outlook with negative, maintains the Issue Rating of 2012 First Series Medium-Term Note with ‘AAA’. The rating results reflect that the regulatory environment of mining industry was deteriorated due to the speed up of excessive capacity cutting since 2016, which was resulting in significant decrease of Feicheng Mining’s profitability, and even heavier debt burden situation. Even more, the carry out of proposed restructuring leaded Feicheng Mining with higher uncertainty on its operation and finance status. However, Shandong Energy Group Co., Ltd. (hereinafter referred to as the " Shandong Energy") provided fully and unconditionally irrevocable joint liability guarantee for Feicheng Mining’s 2012 First Series Medium-Term Note, which would still provide strong secure for the repayment liability.
The main drivers of the ratings are as follows:
1. China’s political environment was stable and its core economic indicators were located in a proper range. Chinese government continued to implements proactive fiscal policy and prudent monetary policy, supporting a comfortable credit environment for real economy. As excess capacity reduction was further enhanced since beginning 2016, coal price started to increase, and coal industry losses improved significantly especially from April due to the supply-side structural reform and the improving demand of downstream market. Meanwhile, the government encourages credit support for high-quality enterprises in industries with excess capacity, which providing the real economy with favorable credit environment.
2. Wealth creation capacity of Feicheng Mining continued to deteriorate and the proposed restructuring made its operation and finance facing uncertainty. The explored reserves of Feicheng Mining’s brownfield regions were limited, and occurrence of security incidents is more likely to increase after years of sustaining works of exploitation. Therefore Feicheng Mining shut down the Yangying Mine in 2016, resulted in decreasing capacity which is also in line with policy direction. Since 2015, the profitability of Feicheng Mining kept suffering from declining coal prices as well as high production costs, resulted in a weakened wealth creation capability. Until end of Sep 2016, the profitability of Feicheng Mining was got even worse and is considered to be difficult to reverse the current situation in short term period. In addition, Feicheng Mining intended to carry out reform and restructuring, which will bring significant uncertainty to the future business operation as well as finance sector for Feicheng Mining.
3. The stability of debt repayment source was very poor, and the degree of deviation between the debt repayment sources and wealth creation capacity of Feicheng Mining was enlarged, which means the stability of debt repayment source was deteriorating, and this was due to the lack of ability on cash generation of Feicheng Mining, overlarge other receivables in current asset and the weak profitability of downstream customers. Therefore Feicheng Mining was considered to have a very poor asset quality and liquidity status.
4. As the debt repayment sources will not capable to cover the outstanding debt of Feicheng Mining, The repayment of Feicheng Mining’s 2012 First Series Medium-Term Note will largely rely upon the fully and unconditionally irrevocable joint liability guarantee from Shandong Energy. Firstly, the coverage ratio of EBITDA to interest from 2013 to 2015 were 0.62, -0.25 and -0.67 respectively, which shown that the debt repayment obligation is unlikely to be realized through using Feicheng Mining’s own funds. Second, Feicheng Mining had been insolvent since 2015, and the short-term interest-bearing debt still took a significant proportion in total interest-bearing debt, which causing high liquidity pressure and hence accelerated deterioration of debt repayment security level of Feicheng Mining. However, despite all above adverse factors, Feicheng Mining’s 2012 First Series Medium-Term Note will still be guaranteed with repayment as Shandong Energy provides fully and unconditionally irrevocable joint liability guarantee to the note.
According to the situation that Feicheng Mining was experiencing sustained losses and insolvency, and the proposed restructure even made its operation and finance face increasing uncertainty, the debt repayment capability is expected to further weakened, therefore Dagong maintains a negative outlook to Feicheng Mining in the next 1~2 years.