TEXT-S&P lowers Winsway rating to 'B+';outlook stable
(The following statement was released by the rating agency)
Feb 28 -
Overview
-- We expect China-based Winsway to complete its acquisition of GCC now that its shareholders have approved the transaction in an extraordinary general meeting on Feb. 28, 2012.
-- Winsway's entry into the upstream coal mining business will increase earnings volatility, in our opinion.
-- We are lowering the long-term corporate credit rating on Winsway to 'B+' from 'BB-'. We are also lowering our issue rating on the company's notes to 'B+' from 'BB-'. At the same time, we are removing all the ratings from CreditWatch, where they were placed with negative implications.
-- The stable outlook reflects our expectation that Winsway's Mongolian coking coal import business will remain satisfactory.
Rating Action
On Feb. 28, 2012, Standard & Poor's Ratings Services lowered its long-term corporate credit rating on China-based Winsway Coking Coal Holdings Ltd. to 'B+' from 'BB-'. The outlook on the rating is stable. We also lowered the issue rating on the company's outstanding senior unsecured notes to 'B+' from 'BB-'. At the same time, we lowered our Greater China scale credit ratings on Winsway and the notes to 'cnBB' from 'cnBB+'. We removed all the ratings from CreditWatch, where they had been placed with negative implications on Nov. 2, 2011.
Rationale
We lowered the rating on Winsway because we expect the company's business risk profile to weaken after it completes the acquisition of Canadian coal miner Grand Cache Corp. (GCC). Following the acquisition, Winsway's profitability is likely to become more volatile due to fluctuating coking coal prices and the risks associated with coal mining operations. GCC's less competitive cost structure compounds the effects of such risks on Winsway's profitability.
We expect Winsway's exposure to coal price volatility to be high after the acquisition, especially if prices trend downward. In our opinion, the acquisition deviates from the company's previous strategy, which emphasized asset-light trading operations with limited inventory and low sensitivity to volatility in coal prices.
A sharp decline in the demand for coking coal and average selling prices (ASP) could significantly weaken Winsway's profitability over the next few quarters. GCC anticipates that its ASP of coking coal will be between US$205 and USS$215 per ton for the quarter ending March 31, 2012. Given global economic woes and softening steel markets, the downward trend in ASP is likely to persist for the next few quarters.
In our view, Winsway's lack of experience in operating coal mines and its upstream investment in GCC significantly increases its exposure to mine-operating risk. Also, we view Winsway's acquisition of a majority stake in GCC as an indication of its aggressive investment appetite. The company intends to leverage the Canadian experience of its partner Marubeni Corp. (BBB/Stable/--), and retain GCC's management team to mitigate such risk. Standard & Poor's acknowledges there is limited execution risk at GCC's mine because the mine is already in operation and in a ramp up stage.
Although Winsway's debt leverage will increase after the acquisition, we believe the company can maintain good financial strength for a 'B+'-rated company. We expect that Winsway's Mongolian coking coal import business will continue to perform satisfactorily in the next 12 months. We forecast the company's ratio of adjusted debt to EBITDA at 3x-3.5x, and the ratio of funds from operations to adjusted debt at or slightly more than 20% in the next 12 months. However, the volatility from the coal mining business and an uncertain global economy could weaken Winsway's cash flow.
We expect the structural subordination risk associated with Winsway's outstanding senior unsecured notes to heighten temporarily following the drawdown of US$400 million in financing loans related to the acquisition. Nevertheless, the risk will lessen over time because the loans will be amortized six months after the drawdown. We project that the ratio of priority debt to total assets will be at or slightly more than 15% after the drawdown of acquisition-related loans. The ratio will decline to less than 15% in the next nine to 12 months.
The rating on Winsway reflects the company's short operating history and its limited record of consistent financial management. Other weaknesses include Winsway's exposure to material supply risks and transportation bottlenecks associated with coal imports from Mongolia. The good growth potential for imported coking coal in China, the company's good competitive position in its core coal import business from Mongolia due to its first-mover advantage, and its growing distribution capability counterbalance the above weaknesses.
Feb 28 -
Overview
-- We expect China-based Winsway to complete its acquisition of GCC now that its shareholders have approved the transaction in an extraordinary general meeting on Feb. 28, 2012.
-- Winsway's entry into the upstream coal mining business will increase earnings volatility, in our opinion.
-- We are lowering the long-term corporate credit rating on Winsway to 'B+' from 'BB-'. We are also lowering our issue rating on the company's notes to 'B+' from 'BB-'. At the same time, we are removing all the ratings from CreditWatch, where they were placed with negative implications.
-- The stable outlook reflects our expectation that Winsway's Mongolian coking coal import business will remain satisfactory.
Rating Action
On Feb. 28, 2012, Standard & Poor's Ratings Services lowered its long-term corporate credit rating on China-based Winsway Coking Coal Holdings Ltd. to 'B+' from 'BB-'. The outlook on the rating is stable. We also lowered the issue rating on the company's outstanding senior unsecured notes to 'B+' from 'BB-'. At the same time, we lowered our Greater China scale credit ratings on Winsway and the notes to 'cnBB' from 'cnBB+'. We removed all the ratings from CreditWatch, where they had been placed with negative implications on Nov. 2, 2011.
Rationale
We lowered the rating on Winsway because we expect the company's business risk profile to weaken after it completes the acquisition of Canadian coal miner Grand Cache Corp. (GCC). Following the acquisition, Winsway's profitability is likely to become more volatile due to fluctuating coking coal prices and the risks associated with coal mining operations. GCC's less competitive cost structure compounds the effects of such risks on Winsway's profitability.
We expect Winsway's exposure to coal price volatility to be high after the acquisition, especially if prices trend downward. In our opinion, the acquisition deviates from the company's previous strategy, which emphasized asset-light trading operations with limited inventory and low sensitivity to volatility in coal prices.
A sharp decline in the demand for coking coal and average selling prices (ASP) could significantly weaken Winsway's profitability over the next few quarters. GCC anticipates that its ASP of coking coal will be between US$205 and USS$215 per ton for the quarter ending March 31, 2012. Given global economic woes and softening steel markets, the downward trend in ASP is likely to persist for the next few quarters.
In our view, Winsway's lack of experience in operating coal mines and its upstream investment in GCC significantly increases its exposure to mine-operating risk. Also, we view Winsway's acquisition of a majority stake in GCC as an indication of its aggressive investment appetite. The company intends to leverage the Canadian experience of its partner Marubeni Corp. (BBB/Stable/--), and retain GCC's management team to mitigate such risk. Standard & Poor's acknowledges there is limited execution risk at GCC's mine because the mine is already in operation and in a ramp up stage.
Although Winsway's debt leverage will increase after the acquisition, we believe the company can maintain good financial strength for a 'B+'-rated company. We expect that Winsway's Mongolian coking coal import business will continue to perform satisfactorily in the next 12 months. We forecast the company's ratio of adjusted debt to EBITDA at 3x-3.5x, and the ratio of funds from operations to adjusted debt at or slightly more than 20% in the next 12 months. However, the volatility from the coal mining business and an uncertain global economy could weaken Winsway's cash flow.
We expect the structural subordination risk associated with Winsway's outstanding senior unsecured notes to heighten temporarily following the drawdown of US$400 million in financing loans related to the acquisition. Nevertheless, the risk will lessen over time because the loans will be amortized six months after the drawdown. We project that the ratio of priority debt to total assets will be at or slightly more than 15% after the drawdown of acquisition-related loans. The ratio will decline to less than 15% in the next nine to 12 months.
The rating on Winsway reflects the company's short operating history and its limited record of consistent financial management. Other weaknesses include Winsway's exposure to material supply risks and transportation bottlenecks associated with coal imports from Mongolia. The good growth potential for imported coking coal in China, the company's good competitive position in its core coal import business from Mongolia due to its first-mover advantage, and its growing distribution capability counterbalance the above weaknesses.
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