(The following statement was released by the rating agency) Fitch Ratings-Hong Kong/Shanghai-November 09: Fitch Ratings has affirmed China-based Baosteel Resources International Company Limited's (BRI) Long-Term Foreign-Currency Issuer Default Rating (IDR) at 'A-'. The Outlook is Stable. BRI's rating reflects its linkage with parent China Baowu Steel Group Corporation Limited (Baowu Steel; A/Stable), one of the world's largest steel producers. Fitch has also affirmed the 'A' rating on the USD500 million 3.875% senior unsecured notes due 2020 issued by BRI's wholly owned subsidiary, Baosteel Financing 2015 Pty Ltd. The notes are unconditionally and irrevocably guaranteed by BRI. The notes issued by Baosteel Financing 2015 are rated at the same level as Baowu Steel because it has granted an investment and keepwell deed and a liquidity support covenant deed to ensure that the issuer, Baosteel Financing 2015, and BRI have sufficient assets and liquidity to meet their respective obligations for the notes. A full list of rating actions can be found at the end of this commentary. KEY RATING DRIVERS Ratings Linked to Parent: BRI is rated one notch below its parent, in line with Fitch's Parent and Subsidiary Rating Linkage criteria, due to the strong linkages between the two entities arising from BRI's unique position as the group's overseas resource-trading platform, offshore financing and resource-development vehicle. Baowu Steel is wholly owned by China's State-owned Assets Supervision and Administration Commission (SASAC) and Fitch applies the Government-Related Entities (GRE) Rating Criteria to derive Baowu Steel's rating, which is one notch below that of the state. Key Offshore Financing Platform: BRI's linkage with and importance to Baowu Steel is evident from its unique position as the group's key centralised fund management and financing platform. Its tasks are separate from another group company, Baoshan Iron & Steel Co. Ltd. (A/Stable), a steelmaker listed on the Shanghai Stock Exchange, which manages similar functions independently for regulatory reasons. The majority of BRI's unused bank-credit facilities of USD3.3 billion are backed by Baowu Steel's letters of credit and it is the only subsidiary to receive such support. Offshore Resource-Development Platform: BRI is responsible for the group's offshore resource development, an integral part of Baowu Steel's medium- to long-term goal of becoming an integrated steel producer. Baowu Steel has supported BRI through asset and equity injections as well as shareholder loans to facilitate its expansion and acquisitions, for instance, the purchase of a majority stake in Australia's West Pilbara iron-ore project. Elevated Leverage on Weak Margins: Fitch expects BRI's leverage to remain elevated in the next two to three years, driven by our forecast for a weak EBITDA margin in the low single-digit range in 2018, reflecting less-than-favourable operating conditions for commodity-trading companies. Capex is likely to remain low, at around USD10 million per year in 2018 and 2019, as the construction of the West Pilbara iron-ore project has been delayed till after 2020. DERIVATION SUMMARY BRI is rated one notch below its parent, Baowu Steel. The strong linkage between the two entities reflects BRI's unique position as the group's offshore resource-development platform, overseas resources-trading platform and offshore financing vehicle. The rating gap reflects the currently limited scope for offshore development and the difference in BRI's core business from that of the parent. KEY ASSUMPTIONS Fitch's Key Assumptions Within Our Rating Case for the Issuer - Capex to remain low during 2018-2019 due to delays in the development of its mining operations. - Fitch iron ore price deck: 2018 - USD65/tonne, 2019 - USD60/tonne, 2020 - USD55/tonne, USD55/tonne thereafter RATING SENSITIVITIES Baosteel Resources International Company Limited Developments that May, Individually or Collectively, Lead to Positive Rating Action -
Positive rating action on Baowu Steel. -
Strengthening of linkages between BRI and Baowu Steel. Developments that May, Individually or Collectively, Lead to Negative Rating Action - Negative rating action on Baowu Steel. - Weakening of linkages between Baowu Steel and BRI. China Baowu Steel Group Corporation Limited Developments That May, Individually or Collectively, Lead to Positive Rating Action -
Increased likelihood of support from central SASAC. -
Positive rating action on the Chinese sovereign (A+/Stable). Developments That May, Individually or Collectively, Lead to Negative Rating Action -
FFO adjusted net leverage exceeding 2.5x on a sustained basis. -
Decreased likelihood of support from central SASAC. -
Negative rating action on the Chinese sovereign. LIQUIDITY Adequate Liquidity: As of end-9M18, BRI had about USD625 million in cash and cash equivalents against USD1.2 billion in short-term debt. The company relies on its USD3 billion of unused banking facilities to refinance its short-term debt, and although the facilities are uncommitted, we think refinancing risk for the company is very low. FULL LIST OF RATING ACTIONS Baosteel Resources International Company Limited Long-Term Foreign-Currency IDR affirmed at 'A-': Outlook Stable Senior unsecured rating affirmed at 'A-' Baosteel Financing 2015 Pty Ltd USD500 million 3.875% senior unsecured notes due 2020 affirmed at 'A' Contact: Primary Analyst Andrew Shingfun Chan +852 2263 9559 Fitch (Hong Kong) Limited 19F, Man Yee Building 68 Des Voeux Road Central, Hong Kong Secondary Analyst Charles Li Analyst +86 21 6898 7990 Committee Chairperson Laura Zhai Senior Director +852 2263 9974 Media Relations: Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: wailun.wan@thefitchgroup.com. Additional information is available on www.fitchratings.com Applicable Criteria Corporate Rating Criteria (pub. 23 Mar 2018) https://www.fitchratings.com/site/re/10023785 Parent and Subsidiary Rating Linkage (pub. 16 Jul 2018) https://www.fitchratings.com/site/re/10036366 Sector Navigators (pub. 23 Mar 2018) https://www.fitchratings.com/site/re/10023790 Additional Disclosures Dodd-Frank Rating Information Disclosure Form https://www.fitchratings.com/site/dodd-frank-disclosure/10051597 Solicitation Status https://www.fitchratings.com/site/pr/10051597#solicitation Endorsement Policy https://www.fitchratings.com/regulatory ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTPS://WWW.FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. 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