Fitch rates Winsway Coking Coal 'BB'; outlook stable
March 24 - Fitch Ratings has today assigned Winsway Coking Coal Holdings Limited (Winsway) a Long-Term Foreign-Currency Issuer Default Rating (IDR) of 'BB' with a Stable Outlook and a foreign-currency senior unsecured rating of 'BB'.
The agency has also assigned an expected rating of 'BB(EXP)' to Winsway's proposed senior unsecured notes. The proceeds will be used to purchase rolling stock, build railway-related infrastructure to increase transportation capacity and to finance investments in upstream coal resources.
The final rating of the proposed notes is contingent upon the receipt of final documents conforming to information already received.
"Winsway's ratings are supported by its unique business model and solid market position as a virtual monopoly in the transportation of Mongolian coal into China. The company's credit strengths are underpinned by its strategic logistics assets at Sino-Mongolian border crossings, strong relationships with China's railway authorities, as well as back-to-back inventory management," says Ms. Ying Wang, Director in Fitch's Asia-Pacific corporates team.
"Winsway's ratings are constrained by its relatively small operating scale (2010 operating EBITDA: about CNY1.2bn or USD180m), which puts it in line with the size of other Fitch-rated Chinese industrial corporates in the 'BB' category. Furthermore Fitch expects negative free cash flow from 2011 to 2013 due to increasing capex," adds Ms. Wang.
Winsway maintains a leading market position in the long haulage land coal imports from Mongolia to China's key coking coal markets.
The company's competitive edge is built upon its early mover advantage to secure strategic land resources for its coal logistics parks at key customs check-points at the Sino-Mongolian border crossings.
In 2010, Winsway procured 9.5 million tonnes of Mongolian and seaborne coal and was responsible for 55% of the Mongolian coal exports to China, according to the company's data.
Winsway's competitive advantage is enhanced by its access to key railway capacity, a major challenge in the transportation of Mongolian coal to different markets in China.
Winsway has "registered user" status with the Hohhot Railway Bureau of China's Inner Mongolia region - as such Winsway's allocation of railway capacity is included in the bureau's annual planning budget.
Winsway has also established joint ventures with various railway bureaus in China to build railway logistics centres in which Winsway owns 51% of equity.
A vast majority of Winsway's procurement and sales contracts are on a "back-to-back" basis, thus lowering its inventory risk. Winsway generally enters into procurement and sales contracts at the same time locking in the volume and marking up the sale price to secure a relatively stable margin.
However, Winsway's credit profile is constrained by its small operating scale, a relatively short operating history as a public company, a lack of product diversification and high planned capex resulting in negative FCF in the short term. Another limitation is a potential mismatch between Winsway's pace of expansion and its ability to secure required additional railway capacity.
Fitch believes Winsway has sufficient liquidity to meet its debt obligations and capex needs over 12 to 18 months. At end-2010, Winsway had CNY6.9bn in total liquidity consisting of about CNY2.5bn in unrestricted cash and around CNY4.4bn in unutilised bank credit facilities, versus around CNY879m in debt maturities and CNY1.7bn in planned capex in 2011.
Winsway ended 2010 with a net cash position and 0.9x of financial leverage (defined as adjusted debt-to- operating EBITDAR ratio).
The Stable Outlook reflects Fitch's expectation that the operating dynamics of Winsway's business environment will not change over the next three to five years, and Winsway's business strategy and financial policy will remain stable.
Negative rating actions could arise if Winsway's net profit (excluding noncash and one-time items) is consistently below CNY70 per ton; or if free cash flow (FCF) remains negative or financial leverage stays above 3.0x on a sustained basis; and/or if revenue declines due to reduced coking coal production from Mongolian/Russian coal reserves and/or reduced railway transportation capacity.
Positive rating guidelines include an increase in Winsway's annual EBITDA to consistently above USD500m, sustained positive FCF, financial leverage sustained below 2.0x, and successful execution of the coking coal logistics and transportation business at Sino-Russian border crossings.
The agency has also assigned an expected rating of 'BB(EXP)' to Winsway's proposed senior unsecured notes. The proceeds will be used to purchase rolling stock, build railway-related infrastructure to increase transportation capacity and to finance investments in upstream coal resources.
The final rating of the proposed notes is contingent upon the receipt of final documents conforming to information already received.
"Winsway's ratings are supported by its unique business model and solid market position as a virtual monopoly in the transportation of Mongolian coal into China. The company's credit strengths are underpinned by its strategic logistics assets at Sino-Mongolian border crossings, strong relationships with China's railway authorities, as well as back-to-back inventory management," says Ms. Ying Wang, Director in Fitch's Asia-Pacific corporates team.
"Winsway's ratings are constrained by its relatively small operating scale (2010 operating EBITDA: about CNY1.2bn or USD180m), which puts it in line with the size of other Fitch-rated Chinese industrial corporates in the 'BB' category. Furthermore Fitch expects negative free cash flow from 2011 to 2013 due to increasing capex," adds Ms. Wang.
Winsway maintains a leading market position in the long haulage land coal imports from Mongolia to China's key coking coal markets.
The company's competitive edge is built upon its early mover advantage to secure strategic land resources for its coal logistics parks at key customs check-points at the Sino-Mongolian border crossings.
In 2010, Winsway procured 9.5 million tonnes of Mongolian and seaborne coal and was responsible for 55% of the Mongolian coal exports to China, according to the company's data.
Winsway's competitive advantage is enhanced by its access to key railway capacity, a major challenge in the transportation of Mongolian coal to different markets in China.
Winsway has "registered user" status with the Hohhot Railway Bureau of China's Inner Mongolia region - as such Winsway's allocation of railway capacity is included in the bureau's annual planning budget.
Winsway has also established joint ventures with various railway bureaus in China to build railway logistics centres in which Winsway owns 51% of equity.
A vast majority of Winsway's procurement and sales contracts are on a "back-to-back" basis, thus lowering its inventory risk. Winsway generally enters into procurement and sales contracts at the same time locking in the volume and marking up the sale price to secure a relatively stable margin.
However, Winsway's credit profile is constrained by its small operating scale, a relatively short operating history as a public company, a lack of product diversification and high planned capex resulting in negative FCF in the short term. Another limitation is a potential mismatch between Winsway's pace of expansion and its ability to secure required additional railway capacity.
Fitch believes Winsway has sufficient liquidity to meet its debt obligations and capex needs over 12 to 18 months. At end-2010, Winsway had CNY6.9bn in total liquidity consisting of about CNY2.5bn in unrestricted cash and around CNY4.4bn in unutilised bank credit facilities, versus around CNY879m in debt maturities and CNY1.7bn in planned capex in 2011.
Winsway ended 2010 with a net cash position and 0.9x of financial leverage (defined as adjusted debt-to- operating EBITDAR ratio).
The Stable Outlook reflects Fitch's expectation that the operating dynamics of Winsway's business environment will not change over the next three to five years, and Winsway's business strategy and financial policy will remain stable.
Negative rating actions could arise if Winsway's net profit (excluding noncash and one-time items) is consistently below CNY70 per ton; or if free cash flow (FCF) remains negative or financial leverage stays above 3.0x on a sustained basis; and/or if revenue declines due to reduced coking coal production from Mongolian/Russian coal reserves and/or reduced railway transportation capacity.
Positive rating guidelines include an increase in Winsway's annual EBITDA to consistently above USD500m, sustained positive FCF, financial leverage sustained below 2.0x, and successful execution of the coking coal logistics and transportation business at Sino-Russian border crossings.
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