OREANDA-NEWS. Fitch Ratings has downgraded China-based Winsway Enterprises Holdings Limited's (Winsway) Long-Term Issuer Default Rating (IDR) to 'C' from 'CCC'. No Outlook has been assigned.

The downgrade reflects Winsway's failure to make a USD13.15m coupon payment due 8 April 2015 for the USD309.3m of outstanding 8.5% notes due April 2016. Winsway's senior unsecured rating and the rating on its 2016 US-dollar denominated notes have been affirmed at 'C', with Recovery Rating of 'RR6'.

The rating action indicates Winsway is in imminent default on coupons and principal payments of the April 2016 notes. Winsway has a 30-day grace period to make the coupon payment that it missed on 8 April 2015, but in Fitch's view, the company lacks the capacity to fully repay the notes and the willingness to pay the coupon even if it has the capacity to do so because of its desire to negotiate a restructuring with existing bondholders.

KEY RATING DRIVERS
Potential Debt Restructuring: Winsway is working on a potential debt restructuring for the April 2016 notes. Fitch believes Winsway's ability to refinance the notes has worsened following the covenants waiver and debt exchange in 2013 and the current weak outlook for the company's financial performance.

Potential Equity Injection: Winsway is in negotiations with some investors for an equity injection to strengthen the company's cash flow position. Fitch believes the equity injection would be contingent on the successful completion of a debt restructuring for the April 2016 notes. As of end-2014, the company's chairman, Mr. Wang, held a 49% stake in Winsway, with the rest held by several small shareholders. Most of Mr. Wang's shares in Winsway have been pledged as security for attaining certain contractual obligations in his indirectly owned companies.

GCC Disposal Unsettled: Winsway said in November 2014 it would dispose its 43% stake in Grande Cache Coal Corporation (GCC), a Canadian coking coal mining subsidiary. Although the company has obtained the approval from Canadian authorities on 9 April 2015 for the disposal, it has yet to receive approval from Chinese authorities.

GCC has USD410m of debt outstanding, but its ability to service the debt is in doubt because its mining operations are unprofitable. Although this debt is ring-fenced from Winsway, any default by GCC may adversely affect Winsway's ability to maintain credit facilities from banks as there are banks that provide financing to both companies.

Very Stretched Liquidity: Fitch expects Winsway's liquidity to remain tight in 2015 as its US-dollar notes are due in April 2016 and the company's ability to generate free cash flow remains weak. At end-2014, Winsway had HKD1.395bn (USD180m) of available cash, with secured short-term debt of HKD1.19bn and USD309.3m of notes due April 2016.

Weak Cash Generation: The likelihood that Winsway's operations would return to profitability is quite low because of weak coal prices, which stem from industry overcapacity and low demand. Winsway had an operating EBITDA loss of HKD139m in 2014. Revenue for its core coking coal processing and trading business slumped 44% in 2014 and the company continued to incur EBITDA losses for this segment.

KEY ASSUMPTIONS
Fitch's key assumptions within our rating case for the issuer include:
- No major improvement in operating environment
- Winsway's sales volume and gross profit margin for the coal transportation business remain at levels similar to 2014's
- Minimal capex spending in 2015 and beyond

RATING SENSITIVITIES
Negative: Future developments that may, individually or collectively, lead to negative rating actions include:
- The Long-Term IDR will be changed to 'RD' (Restricted Default) from 'C', if Winsway fails to pay the coupon after the expiration of the grace period.

Positive: Future developments that may, individually or collectively, lead to positive rating actions include:
- The company pays the coupon within the grace period and successfully completes the potential debt restructuring of the April 2016 notes.