Qinghai Provincial Investment Group #BB-# Ratings Placed On CreditWatch Negative On Heightened Refinancing Risk

Stocks and Financial Services Press Releases Thursday June 21, 2018 18:54
HONG KONG--21 Jun--S&P Global Ratings

HONG KONG (S&P Global Ratings) June 21, 2018--S&P Global Ratings today placed its 'BB-' long-term issuer credit rating on Qinghai Provincial Investment Group Co. Ltd. (QPIG) on CreditWatch with negative implications. At the same time, we placed the 'BB-' long-term issue rating on the China-based aluminum producer's outstanding U.S. dollar-denominated senior unsecured notes on CreditWatch with negative implications.

We placed the ratings on CreditWatch with negative implications because we believe QPIG faces increased refinancing risks for its two US$300 million senior unsecured notes each due in September and December 2018, respectively.

QPIG has total short-term debt of Chinese renminbi (RMB) 19.56 billion due in the 12 months ending May 2019, including the two US$300 million notes (around RMB3.9 billion). As one of the largest state-owned enterprises in Qinghai province, the company was able to roll over its bank borrowing smoothly so far this year. However, the company still does not have a concrete, credible plan to refinance the two US$300 million notes.

While we believe QPIG should have enough financial resources to repay the notes due in September, it relies on market conditions to refinance the notes due in December. As of May 31, 2018, QPIG has a cash balance of RMB2.96 billion, of which about RMB1.49 billion is unrestricted. The company also has RMB22.46 billion of unused bank credit lines, but all of these are uncommitted. All of QPIG's U.S. dollar notes are currently trading materially below par, making it extremely difficult to tap the offshore bond market. At the same time, access to the domestic bond market has become more difficult due to rising defaults this year. QPIG hasn't issued any bonds in the domestic market so far this year.

We don't expect QPIG's highly leveraged financial position to improve this year despite favorable operating conditions for aluminum producers. In our view, the company's funds from operation may be minimal, while its ratio of debt to EBITDA will stay above 25.0x over the next 12 months.

The CreditWatch placement reflects QPIG's heightened refinancing risk. The CreditWatch resolution will depend on the company's ability to formulate a concrete and credible plan to refinance and repay its near-term maturities, specifically the two outstanding US$300 million notes due in September and December this year.

We could lower the rating if QPIG doesn't come up with a concrete and credible plan to secure refinancing. We could also lower the rating by more than one notch if we see a lower likelihood of extraordinary government support to the company than we currently expect.

We will likely affirm the rating if QPIG can successfully execute a refinancing plan before the outstanding notes come due.

Our issue ratings consider QPIG's capital structure as of Sept. 30, 2017. As of that date, the company has RMB8.39 billion of secured debt and RMB11.69 billion of unsecured debt issued by its operating subsidiaries, compared with its total debt of about RMB40.04 billion.

We equalize our ratings on QPIG's outstanding senior unsecured notes to the issuer credit rating on the company. Although QPIG's priority debt ratio is slightly above 50%, we do not notch down the issue ratings considering the company's important government status. We believe the Qinghai provincial government is unlikely to dilute its ownership in QPIG, and therefore structurally subordinated lenders would not have weaker recovery prospects than other senior lenders.

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