Fitch Downgrades China Fishery to 'B-'; On Rating Watch Negative
The downgrade reflects the high risk that China Fishery's liquidity will be inadequate because of the volatility in the company's operating cash flows as a result of weather changes. China Fishery's high proportion of short-dated debt, which poses refinancing risk from time to time, continues to reflect the company's lack of a systematic and transparent approach in financial management processes.
Fitch has placed the rating on RWN because China Fishery is facing short-term liquidity pressure. The RWN will be resolved once there is further clarity on the outcome of ongoing discussions between China Fishery and its bankers. If the company's liquidity deteriorates further, it may result in further rating downgrades. If its debt maturity profile improves, Fitch will reassess the ratings, and take into account China Fishery's future liquidity gap and financial profile.
KEY RATING DRIVERS
Liquidity Risk: China Fishery's short-term bank loan amounted to USD299m at end-June 2015. On 8 October 2015, the company announced that it has commenced discussions with lenders on additional financing and supplements and amendments in respect of its borrowings. If the short-term debt maturities are not adequately addressed, China Fishery could face a liquidity crunch.
Fitch estimates that the company's cash on hand and inventory sales can at best provide only USD150m. Its total allowable catch is likely to be poor over the next six to twelve months because the El Nino weather effect this season is one of the strongest on record. As a result, Fitch expects free cash flow generation to be weak and cash balance to be low for the financial year to end-September 2016 (FY16), which may lead to a liquidity shortfall of up to USD300m.
Escalating Leverage: Fitch expects net leverage, as measured by adjusted net debt/EBITDAR, to remain above 5.0x in the next 18 months and not fall below 4.0x until FY18. The worsening financial profile, with EBITDA dwindling to about USD150m and free cash generation to USD70m, will further limit China Fishery's financial flexibility. China Fishery had net debt of USD828m and net leverage of 4.9x at end-June 2015.
Fishmeal Business Supports Ratings: Fitch expects China Fishery's Peruvian fishmeal segment to account for over 70% of China Fishery's EBITDA from 2015. The Peruvian fishmeal operation supports China Fishery's ratings, given the firm demand for fishmeal, which is a staple needed for aquaculture globally. The Copeinca business that China Fishery acquired has demonstrated the ability to generate positive free cash flow over weather cycles. Furthermore, the company's fleet operation, which provides supporting services to fishing vessels, has been generating positive EBITDA since FY14, reversing from two consecutive years of losses. Fitch expects this segment to generate USD18m EBITDA in 2015, contributing to about 15% of the group's total EBITDA, and remain profitable.
Fitch's key assumptions within our rating case for the issuer include:
- Dividend payments to resume from FY16 at 30% payout ratio
- Maintenance capex of USD30m a year
- Oil prices and bunker costs to remain at current levels
If China Fishery's liquidity worsens, its ratings will be further downgraded. If it is able to improve its debt maturity profile, Fitch will revisit the credit and establish new rating sensitivities.