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 parent,
Key Rating Drivers
Parent's Strong State Linkages: BISC is the world's largest rare earth producer and received 75% (historically around half) of the annual rare earth ore production quota issued by
BISC is also the largest industrial company in the
'High' Operational, Strategic Support Incentive: We assess BISC's operational and strategic incentive to support BSUC as 'High'. BISC owns 55% of BSUC, its main steel operating subsidiary, which accounted for more than 70% of the group's total assets and around 40% of consolidated EBITDA at end-2022. In addition, BISC has absolute management control over BSUC, with significant management overlap. Some of group's rare earths also serve as raw material for BSUC's steel products.
'Medium' Legal Incentive for Support: We believe that BISC has a 'Medium' legal incentive to support BSUC, as it continuously guarantees a significant part of BSUC's bank debt. BISC provided guarantees to over 70% and 40% of BSUC's total debt in 2022 and 2021, respectively. According to management, guarantees will decrease from the 2022 level but we expect the guarantee percentage to remain meaningful.
Leverage to Drop: BSUC's and BISC's leverage (net debt/EBITDA) rose to 5.7x and 3.6x in 2022 (2021: 3.3x and 2.6x), respectively, on weak steel profitability amid high raw-material costs and a low steel average selling price (ASP). BSUC's leverage profile outperformed BISC's as its rare earth operations generated over
Financial Flexibility Offsets High Leverage: BSUC's financial flexibility remains healthy with EBITDA interest coverage of 4.1x in 2022 (2021: 5.7x), benefitting from decent funding costs given its good banking relationships and BISC's government-related entity status. BSUC had
However, over 65% of short-term debt is bank borrowings, which we expect to roll over given its strong banking relationships. BSUC obtained around
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 from the same methodology that we use for
Key Assumptions
Fitch's Key Assumptions Within Our Rating Case for the Issuer
Revenue of around
EBITDA margin to improve to 9.5% in 2023 from lower raw material costs before rising further to average over 10% in 2024-2026 on continued raw material cost reduction.
Capex of 2%-3% of revenue for BSUC during 2023-2026; capex will be used mainly for environment-related facility upgrades and automation.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
An upward revision in Fitch's internal assessment of the creditworthiness of
Increase in the likelihood of support from the Inner Mongolia government
An upward revision in Fitch's internal assessment of the creditworthiness of BISC
Factors that could, individually or collectively, lead to negative rating action/downgrade:
A downward revision in Fitch's internal assessment of the creditworthiness of Inner Mongolia
Weakening 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 with BSUC as its main operating subsidiary. BSUC has the capacity to produce around 17 million tonnes of steel products annually. Its main products include pipes, flat steel, section steel and long products. BSUC 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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