HONG KONG, May 19 (Fitch) Fitch Ratings has assigned China - based Yanzhou Coal
Mining Company Limited's (Yancoal, BBB-/Negative) proposed USD-denominated
perpetual capital securities an expected rating of 'BB(EXP)'.
The proposed perpetual securities are to be issued by Yancoal International
Trading Co., Ltd. and guaranteed by Yancoal on a subordinated basis.
Fitch has assigned a 50% equity credit treatment to the securities, in line with
the proposed terms and conditions, to reflect optional cumulative deferral of
coupon payments. Given the language on replacement intent in the proposed terms
and conditions, Fitch does not consider 2038, when there will be a cumulative
100 basis point step-up in the coupon, as the effective maturity date of the
proposed perpetual in assessing the equity credit.
The proposed securities are rated two notches below Yancoal's Issuer Default
Rating (IDR) in accordance with Fitch's 'Treatment & Notching of Hybrids in
Nonfinancial Corporate & REIT Credit Analysis' criteria.
The final rating and equity credit are contingent upon receipt of final
documents conforming to information already received.
Key Rating Drivers
Weakened credit metrics: The Negative Outlook reflects Yancoal's weakened credit
metrics due to deteriorating coal market conditions since Q312. Funds from
operations (FFO) gross interest coverage weakened to 4.9x at end-2012 (end-2011:
17.9x), and FFO adjusted net leverage to 3.8x (1.1x), levels which are weak for
its current rating of 'BBB-'. Yancoal's earnings in 2012 were also affected by
its acquisition of Gloucester Coal in Australia and related integration costs.
However, even after adjusting for any exceptional items in 2012, Fitch is of the
view that Yancoal's credit metrics are unlikely to recover to levels that are
comfortable for its current ratings before 2015, given the agency's expectations
for low coal prices and remaining acquisition-related payments in 2013.
Coal market upside limited:Fitch believes coal prices have bottomed out, but
does not expect thermal coal prices to see much upside in the next 18 to 24
months. Yancoal has taken a number of steps to reduce its operating expenditure
at its Chinese as well as at its higher-cost Australian mines. However, the
Negative Outlook indicates the possibility of a rating downgrade if Yancoal's
credit metrics do not improve to levels acceptable for its 'BBB-' ratings in the
next 24 months due to weaker-than-expected coal prices or the company failing to
achieve expected opex and capex savings. Any near-term pressure on its ratings
is, however, limited, especially considering the still strong liquidity of the
company. At end-2012, the company had CNY16.1bn of cash against short-term debt
Prominent coal mining state-owned enterprise: Yancoal's IDR is underpinned by
its position as one of the largest coal mining companies in China, with 21
operational mines in China and Australia. Its operating scale, reserve base,
and mine-life statistics are in line with peers in the high 'BB' and low 'BBB'
categories. Following its merger with Gloucester Coal Limited in mid-2012, the
merged entity is renamed as Yancoal Australia Limited and has become the largest
listed pure coal mining enterprise in Australia. Its diversified coal mining
locations materially reduce the risk of business interruption, such as poor
weather or transportation accidents. The proximity of its mines to end-users,
especially in northern China, reduces transportation costs.
Single-commodity miner: Yancoal's credit profile is materially tempered by the
company's focus on a single commodity, exposing it to coal price volatility as
evident from the company's recent earnings performance.
Limited linkage with parent:Yancoal is 53% owned by Yankuang Group Corporation
Limited (Yankuang), which is wholly owned by the Shandong State-owned Assets
Supervision and Administration Commission (SASAC). The linkage is considered
weak-to-moderate and therefore Yankuang's weaker credit profile has not
constrained Yancoal's rating. Yancoal's large number of institutional minority
shareholders and the Hong Kong Stock Exchange listing rules provide a meaningful
counter-balance to Yankuang's controlling stake. Furthermore, Fitch has not
provided any rating uplift to Yancoal an account of any implied support from
Negative: Future developments that may, individually or collectively, lead to
negative rating action include
-Failure to reduce FFO adjusted net leverage to less than 2.5x by 2015
-Further material decline in coal prices below Fitch's expectations
-Business decisions made by Yankuang Group which are unfavourable to Yancoal
Positive: Future developments that may, individually or collectively, lead to
positive rating action, such as a revision of Outlook to Stable, include
-Demonstrated ability to improve financial leverage to below 2.5x, through
successful cost and capex management without impairing its operating or trading
+852 2263 9922
Fitch Ratings (Hong Kong) Limited
Room 2801, Tower Two, Lippo Centre
89 Queensway, Hong Kong
+852 2263 9975
Jeong Min Pak
+82 2 3278 8360
Media Relations: Wai Lun Wan, Hong Kong, Tel: +852 2263 9935, Email:
Additional information is available on www.fitchratings.com.
Applicable criteria, 'Corporate Rating Methodology', dated 8 August 2012, are
available on www.fitchratings.com.
Applicable Criteria and Related Research:
Corporate Rating Methodology
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