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Fitch Upgrades Sinochem to 'A-', Outlook Stable

Date:2014-01-09 Source:Reuters

Jan 9 (Reuters) - (The following statement was released by the rating agency)

Fitch Ratings has upgraded Sinochem Hong Kong (Group) Company Limited's (Sinochem HK) Long-Term Issuer Default Rating to 'A-' from 'BBB+' and senior unsecured ratings to 'A-' from 'BBB+'. Sinochem's subordinated perpetual securities have also been upgraded to 'BBB' from 'BBB-'. The Outlook for the IDR is Stable. The ratings for its rated issues have also been upgraded and a list of rating actions taken is at the end of this commentary.

This upgrade follows a change to using a top-down approach instead of a bottom-up approach under Fitch's Parent Subsidiary Linkage criteria to assess its parent Sinochem Group's (Sinochem) rating profile. Sinochem HK's ratings are equalised with that of its parent's, which are two notches lower than China's sovereign rating of 'A+' with Stable Outlook.


Evidence Supports Stronger State Linkage: Sinochem is now assessed to have stronger linkage with the state due to the increasing importance of its agrochemical operations, especially in seeds. This conclusion is supported by more detailed information of specific state-driven activities performed by Sinochem that has been provided by the company. The new information also shows previously unexplored strong state linkages in rubber and other chemical operations. Detailed financial information compiled by the company puts the proportion of its long-term assets in the strategic agrochemical and chemical sectors at 30%. This does not include its oil & gas assets, including its contribution to the country's strategic reserves, that are strategic to the state and which account for more than 30% of the company's assets.

Role in Agricultural Modernisation: Sinochem's agrochemical operations are the only horizontally and vertically integrated ones in China, with market coverage of 95%. Soil enrichment, farmers' skill development and education, and bio-tech R&D in agrochemicals are all essential tasks performed by Sinochem on a quasi-commercial basis in conjunction with the Ministry of Agriculture to meet the primary state objective of achieving and maintaining a certain level of food production self-sufficiency.

Past Investments Yielding Results: Fitch expects Sinochem HK's credit metrics to improve in 2014, but this is sensitive to the global oil price level and the new investments that Sinochem HK continues to make. Sinochem HK's large investments in oil fields and property undertaken by its Hong Kong-listed subsidiary Franshion Properties (China) Limited (Franshion, 'BBB-'/Stable) has supported the improvement in Sinochem HK's credit metrics. Its net debt/EBITDAR ratio is expected to fall below 3.0x in 2013 from 4.0x in 2012 and 6.0x in 2011. The investment in the Peregrino oil field in Brazil made in 2011 made its first full-year contribution in 2013. Franshion's EBITDA rose by 140% in 2012 after it stepped up its development activities, especially in residential property development. However, Sinochem HK's future investments in oil fields may be constrained by intense competition for operating oil & gas projects.

Group Leverage Increase Temporary: Sinochem's leverage has increased to 6.0x in 2012 from 4.5x in 2011. This was due to an increase in investments in the energy and agriculture segments, and weak performance from Shanghai-listed subsidiary Sinochem International Corporation due to weak rubber prices. These developments outside Sinochem HK resulted in Sinochem's leverage rising in 2012 at a time when Sinochem HK's leverage fell. Slower future capex and maiden contributions from its Quanzhou refinery from 1Q14 will likely lead to an improvement in leverage in 2014.


Positive: Future developments that may, individually or collectively, lead to positive rating action include:

- Positive rating action on the Chinese sovereign

- Strengthening linkages between Sinochem and the Chinese sovereign

Negative: Future developments that may, individually or collectively, lead to negative rating action include:

- Negative rating action on the Chinese sovereign

- Weakening linkages between Sinochem HK and Sinochem

- Weakening linkages between Sinochem and the Chinese sovereign

The list of rating actions is as follows:

- Long-Term Foreign-Currency IDR upgraded to 'A-' from 'BBB+'; Outlook Stable

- Foreign currency senior unsecured rating upgraded to 'A-' from 'BBB+'

- Issued by SPV Sinochem Overseas Capital Company Limited guaranteed by Sinochem HK

- 4.5% USD1,500m senior notes due 2020 upgraded to 'A-' from 'BBB+'

- 6.3% USD500m senior notes due 2040 upgraded to 'A-' from 'BBB+'

- Issued by SPV Sinochem Global Capital Co., Ltd. guaranteed by Sinochem HK

- 5.0% USD500m perpetual securities upgraded to 'BBB' from 'BBB-'