S&P: Ratings On Baosteel Group And Subsidiaries Placed On CreditWatch Negative On Merger With Wuhan Iron & Steel
We placed the ratings on CreditWatch because we see negative implications in both financial and business aspects from the proposal by Baoshan Iron & Steel, a Baosteel core subsidiary, to absorb Wuhan Iron & Steel, a WISCO core subsidiary. If the proposal goes through, we believe the combined group's financials are likely to deteriorate due to WISCO's higher debt burden. As of end-2015, the pro forma debt-to-EBITDA ratio of the combined group is likely to be about 14x, compared with about 9x of Baosteel Group before the proposed merger.
"We also expect Baosteel Group's relatively strong competitive position and profitability to be affected by WISCO's weak product portfolio and operating efficiency," said S&P Global Ratings credit analyst Claire Yuan.
Although the combined group will benefit from the scale, established clientele, and product and geographic diversity, we believe the overall competitive position may weaken as synergies take time to materialize. Still, the level of implementation and integration will depend on the final consolidation plan by the Chinese government. We will assess the influence on the combined group in terms of financial position and business operation.
In our view, the extent of the ongoing and extraordinary support from the Chinese government to the new group, which could offset the negative impact on the financials to some degree, is subject to further clarification on further integration and the execution plan for the transaction.
On Sept. 21, 2016, Baoshan and Wuhan Iron & Steel announced that they propose to issue shares to all shareholders of the latter, and to consolidate Wuhan Iron & Steel without a change in the controlling shareholder structure. The merger is a major transaction in China's steel industry, in accordance with the supply-side reform and state-owned enterprise reform. Upon completion of the merger, the combined group will reach crude steel production capacity of 60 million tons. As of the end of 2015, WISCO accounts for about 26% of the combined group's total assets.
We aim to resolve or update the CreditWatch placement as soon as we have further information on the merger, depending on the implementation and level of consolidation.
"In resolving the CreditWatch, we will review the transaction once it is settled or close to being settled," said Ms. Yuan. "We will also assess the likelihood of extraordinary government support the combined group will receive if it faces financial distress."
We may lower the ratings on the combined group and its subsidiaries by one notch or more if we believe the high financial leverage, weakening competitive position, and other potential changes will have a negative impact on the combined group's credit profile.