Fitch confirms Inner Mongolia Baotou Steel Union is ‘BB+’; Stable outlook
Fitch Ratings confirmed
The outlook is stable.
BSUC’s ratings are derived from our internal assessment of the consolidated credit profile of its immediate parent at 55%,
The stable outlook reflects our expectations for stable operation of BSUC, with continued operational, administrative and financial support from BISC.
Main rating factors
Parent’s Solid State Links: BISC is the largest rare earth producer in the world and has historically received approximately half (55% in 2021) of the annual rare earth ore production quota issued by
BISC is also the largest industrial company in the
“High” operational and strategic incentive for parental support: We believe that BISC has a “high” operational and strategic incentive to support BSUC. BISC owns 55% of BSUC, which is its main steel operating subsidiary, representing more than 70% of the group’s total assets and more than 50% of consolidated EBITDA at the end of 2021. BISC also has absolute management control over BSUC , with significant management overlap. Meanwhile, some of the group’s rare earths serve as the raw material for BSUC’s steel products.
“Average” legal incentive for parental support: We believe that BISC has an “average” legal incentive to support BSUC, as it permanently guarantees a significant portion of BSUC’s bank debt.
High and Persistent Leverage: We expect BSUC’s standalone credit profile to remain low despite high leverage, as measured by Net Debt/EBITDA. We expect net debt to remain above 4.0x in 2022-25 (2021: 3.3x) as the average selling price of steel is expected to decline from high levels in 2021. We expect a slight recovery medium-term capex, but it should remain reasonable in relation to sales. We expect BSUC’s financial flexibility measures to remain intact, with EBITDA/interest paid maintained above 4.0x (2021: 5.7x)
Stable funding provides liquidity: BSUC had
We expect BSUC to be able to refinance its short-term debt, with support from BISC. The BISC had
We rate BSUC on a top-down basis from its parent company according to our parent-subsidiary relationship rating criteria. Our internal assessment of BISC’s credit profile is based on our government-related entity rating criteria.
BSUC’s rating is derived using the same methodology used for
EBITDA margin will drop to 10% in 2022 due to high raw material costs, then stabilize at 12% in 2023-2025, supported by lower input costs and a recovery in margin.
Capex of approximately 3% to 4% of revenue over the 2022-2025 period, mainly for technical and environmental upgrades of facilities.
Factors that could, individually or collectively, lead to positive rating action/improvement:
An update to Fitch’s internal assessment of the creditworthiness of
Increased likelihood of Inner Mongolia government support
Factors that could, individually or collectively, lead to a negative rating action/downgrade:
A downgrade in Fitch’s internal assessment of Inner Mongolia’s creditworthiness
Lowering the likelihood of support from the government of Inner Mongolia
Weakening of the links between the BISC and the BSUC
Best/Worst Case Evaluation Scenario
International credit ratings of non-financial corporate issuers have a best-case scenario for a rating upgrade (defined as the 99th percentile of rating transitions, measured in the positive direction) of three notches over a rating horizon three years; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured negatively) of four notches over three years. The full range of best-case and worst-case credit ratings for all rating categories ranges from ‘
Liquidity and debt structure
Adequate liquidity: BSUC had
BISC is engaged in iron ore and rare earth mining and steel production and BSUC is its main operating subsidiary. BSUC has an annual production capacity of steel products of about 17 million tons. Its main products are tubes, flat steel, profile steel and long products. BSUC has expanded its business profile to include iron ore and rare earth mining in recent years, supported by asset injections from BISC.
REFERENCES FOR A MOSTLY MATERIAL SOURCE CITED AS A KEY SCORING FACTOR
The main sources of information used in the analysis are described in the applicable criteria.
Unless otherwise specified in this section, the highest level of ESG Credit materiality is a score of “3”. This means that ESG issues are credit-neutral or have minimal impact on the entity’s credit, either because of their nature or the way they are managed by the entity. For more information on Fitch’s ESG materiality scores, visit www.fitchratings.com/esg