Shandong Yuhuang Chemical Outlook Revised To Negative On Weakening Liquidity And Capital #B+# Rating Affirmed

Stocks and Financial Services Press Releases Tuesday June 26, 2018 18:09
HONG KONG--26 Jun--S&P Global Ratings

HONG KONG (S&P Global Ratings) June 26, 2018--S&P Global Ratings revised its outlook on Shandong Yuhuang Chemical Co. Ltd. to negative from stable. At the same time, we affirmed our 'B+' long-term issuer credit rating on the China-based commodity chemical producer and oil refiner. We also affirmed our 'B+' long-term issue ratings on the senior unsecured notes that Yuhuang guarantees.

We revised the outlook to negative to reflect Yuhuang's diminishing liquidity buffer amid tightened liquidity conditions in China. The company's access to long-term debt funding has reduced while it has a material amount of debt maturing in the next 12 months. Yuhuang may need to rely on short-term financing to repay these maturities, which would negatively affect its capital structure, in our view. Creditors' concern that Yuhuang may have to repay debt at bankrupt Hongye Chemical Group Co. Ltd., to which it provided an external guarantee, also contributes to the reduced financing flexibility.

Given Yuhuang's current limited access to the bond market, we believe the company may rely on short-term bank loans or self-generated cash to repay its notes due in the next 12 months. Yuhuang aimed to tap the domestic bond market to refinance its borrowings in 2017 but was not successful. The company repaid its Chinese renminbi (RMB) 500 million notes due in January 2018 using self-generated cash. It has onshore bonds of RMB1.68 billion due in the second half of 2018 and RMB2.0 billion due in 2019, assuming all bondholders exercise their put options.

We expect Yuhuang's liquidity buffer to remain constrained even if we consider that the liquidation of Hongye, which is currently underway, is unlikely to cause imminent cash outflow for the company. So far, Yuhuang has not repaid any of Hongye's loans that it guaranteed. As of end-2017, Yuhuang has provided total external guarantees of RMB2.56 billion, of which RMB1.51 billion is related to Hongye. The Shandong Heze government is leading the liquidation negotiations with creditors, and all creditors have agreed to not accelerate repayment of Hongye's loans or ask Yuhuang to repay the guaranteed debt on behalf of Hongye. Hongye is a chemical manufacturer based in Heze city.

In our view, Yuhuang will be able to roll over its short-term bank loans, given its well-established relationships with banks. However, we see some uncertainty on whether the company can refinance its maturing bonds through more bank borrowings, even though it still has significant unused uncommitted short-term banking facilities. Yuhuang's liquidity position may deteriorate sharply if its relationships with banks weaken or its access to the capital markets remains restricted.

Assuming generally stable refining and chemical margins, we expect Yuhuang to continue to generate mid-to-peak cycle profitability. The company's 2017 performance is in line with our expectation and the first quarter 2018 results are in line with our full year forecasts.

The negative outlook for the next 12 months reflects our view that Yuhuang's capacity to refinance its short-term maturities, particularly through long-term funding, may have weakened. The weakening is due to recent tightened domestic funding conditions and the payment risk on the external guarantee to Hongye. Yuhuang's capital structure may weaken materially if the company relies on short-term refinancing to repay its bonds due.

We could lower the rating by more than one notch if Yuhuang's liquidity deteriorates sharply. This could happen if the company's banking relationships weaken or its access to the bond market remains restricted over a prolonged period.

We could also lower the rating if: (1) Yuhuang's capital structure weakens as indicated by a weighted average debt maturity profile of less than two years; or (2) the company's operating performance deteriorates or capital spending exceeds our base case such that its ratio of FFO to debt falls below 12%.

We may revise the outlook to stable if Yuhuang's liquidity position improves. This could happen if the company is able to refinance its upcoming notes maturities with long-term funding.

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