Fitch Ratings has affirmed
The Outlook is Stable.
BSUC's ratings are derived from our internal assessment of the consolidated credit profile of its immediate 55% parent,
The Stable Outlook reflects our expectation of BSUC's steady operation, with continued operational, management and financial support from BISC.
Key Rating Drivers
Parent's Solid State Linkages: BISC is the world's largest rare earth producer and has historically received around half (55% in 2021) of the annual rare earth ore production quota issued by
BISC is also the largest industrial company in the
'High' Operational, Strategic Incentive For Parental Support: We believe BISC has a 'High' operational and strategic inventive to support BSUC. BISC owns 55% of BSUC, which is its main steel operating subsidiary, accounting for more than 70% of the group's total assets and over 50% of consolidated EBITDA at end-2021. BISC also has absolute management control over BSUC, with significant management overlap. Meanwhile, some of group's rare earths serve as raw material for BSUC's steel products.
'Medium' Legal Incentive For Parental Support: We believe that BISC has a 'Medium' legal incentive to support BSUC, as it continuously guarantees to a significant part of BSUC's bank debt.
Persistently High Leverage: We expect BSUC's Standalone Credit Profile to stay weak amid high leverage, as measured by net debt/EBITDA. We expect net leverage to remain above 4.0x in 2022-2025 (2021: 3.3x), as the average selling price for steel is likely to drop from 2021's high levels. We expect a slight pick-up in capex in the medium term, but it should remain reasonable compared with revenue. We expect BSUC's financial flexibility metrics to remain intact, with EBITDA/interest paid maintained at above 4.0x (2021: 5.7x)
Stable Funding Provides Liquidity: BSUC had
We expect BSUC to be able to roll over its short-term debt, given support from BISC. BISC had
Derivation Summary
We rate BSUC on a top-down basis from its parent under our Parent and Subsidiary Linkage Rating Criteria. Our internal assessment of BISC's credit profile is based on our Government-Related Entities Rating Criteria.
BSUC's rating is derived under the same methodology as used for
Key Assumptions
Revenue to drop to below
EBITDA margin to drop to 10% in 2022 due to high raw material costs, then stabilising at 12% in 2023-2025, supported by lower input costs and a margin recovery.
Capex of around 3%-4% of revenue during 2022-2025, mainly for facility technical and environmental upgrades.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
An upgrade of Fitch's internal assessment of the creditworthiness of
Increase in the likelihood of support from the Inner Mongolia government
Factors that could, individually or collectively, lead to negative rating action/downgrade:
A downgrade of Fitch's internal assessment of the creditworthiness of Inner Mongolia
Weakening of likelihood of support from the Inner Mongolia government
Weakening linkages between BISC and BSUC
Best/Worst Case Rating Scenario
International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from '
Liquidity and Debt Structure
Adequate Liquidity: BSUC had
Issuer Profile
BISC is engaged in iron ore and rare earth mining and steel production and BSUC is its main operating subsidiary. BSUC has an annual steel product production capacity of around 17 million tonnes. Its main products include pipes, flat steel, section steel and long products. BSUC has expanded its business profile to include iron ore and rare earth mining in recent years, supported by asset injections from BISC.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg
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