Fitch Downgrades Anton to 'CCC'
The rating action reflects Anton's elevated refinancing risk amid a deteriorated operating environment. Fitch expects industry conditions to remain weak due to significant near-term pressure on oil prices. There is thus limited potential for Anton to meaningfully improve its operating cash flows in the near-term. The company will continue to be highly reliant on roll-over and maintenance of credit facilities to fund its operations.
KEY RATING DRIVERS
Deteriorated Industry Conditions: Oil prices continue to be under pressure in 2016. Reflecting the near-term pressures on oil prices, Fitch has lowered its oil and gas price assumptions on Jan 20, 2016. Due to weak oil prices, upstream exploration and production companies are expected to further rationalise their capital expenditures in 2016, likely leading to increased competitive conditions and margin pressures for oilfield services companies. There is also a risk of write-downs of oil field services companies' order-books; Anton had to write-down a total of CNY335m in orders during 2015 following the weakening of oil prices during the year.
Substantial Refinancing Risk: Anton has substantial short term debt maturities, relative to its cash. At Jun 2015 the company had unpledged cash of CNY265m, while unsecured short term debt stood at CNY506mil. Anton's available bank facilities are mostly of short term nature, and would need to be renewed over the course of the next few quarters. Aside from the short-term debt that needs to be refinanced, Anton has to refinance a CNY200m of domestic bonds maturing in Aug 2016.
Tight Liquidity: As a result of lengthy accounts receivable collection, Anton's ability to meet its operating expenses and interest costs - totalling close to CNY300m for the first six months of 2015, is highly reliant on short term banking facilities. Maintaining sufficient banking facilities could be more challenging amid volatile industry conditions.
Risk to Overseas Exposure: Anton's new orders largely come from overseas markets, especially in Iraq. Iraq's contribution to Anton's revenue was 33% in 1H15 compared to 16% in 2013. Of Anton's CNY2.8bn order book at Dec 2015, Fitch estimates that about 35%-40% is contributed by contracts in Iraq. Although the overseas contracts have enhanced Anton's geographical diversity, and offer higher margins than domestic ones, they carry higher geopolitical risk, and Anton faces stiff competition in many of its overseas markets.
Fitch's key assumptions within the rating case for Anton include:
- Revenue in 2015 to decline by 10%-15%, and to grow marginally thereafter
- Gross margin at 25-30% in 2015-2017
- Working capital cycle to stay similar to that in 2015
- More than 50% reduction in average CAPEX in 2015-2017 from 2014 level
Negative: Future developments that may, individually or collectively, lead to a negative rating action include:
- A failure to roll over short term debt, absence of adequate bank credit lines, failure to maintain adequate cash balances, deterioration in cash conversion cycle, higher-than-expected capital expenditure, or weakening of the company's trading performance.
- An increase in the quantum of secured debt could result in a downgrade of the Recovery Rating leading to a downgrade of its Senior Unsecured Rating.
Positive: Future developments that may, individually or collectively, lead to positive rating action include:
- A material improvement in liquidity, demonstration of the ability to adequately cover debt service obligations and to reduce refinancing risks - including satisfactorily addressing the sizable notes maturities in 2016, and improvement in operating performance, supporting the company's ability to maintain a financial and liquidity profile adequate for a Long-Term IDR of 'B-'.