(The following statement was released by the rating agency) Fitch Ratings-Hong Kong/Shanghai-April 07: Fitch Ratings has revised the Rating Watch to Evolving from Positive on ENN Ecological Holdings Co., Ltd.'s (ENN EC) 'BB' Long-Term Issuer Default Rating (IDR) and the 'BB' rating on its USD500 million 7.5% senior unsecured notes issued by ENN Clean Energy International Investment Limited. ENN EC indirectly holds 100% of ENN Clean Energy International Investment Limited and guarantees the US dollar-denominated notes. Fitch continues to expect that ENN EC will complete its planned acquisition of a 32.80% stake in ENN Energy Holdings Limited (ENN Energy, BBB/Stable) from the two companies' common ultimate controlling shareholder Chairman Wang Yusuo and his wife. Upon completion of the deal, Fitch expects to assess ENN EC's rating based on the consolidated group credit profile, which is much stronger than the existing credit profile of ENN EC. However, ENN EC's credit metrics on a standalone basis have weakened due to declining prices of methanol and other commodities, and we expect these metrics to remain weaker than those commensurate with its existing 'BB' rating in the next 12-24 months because of the coronavirus-related impacts. If the company fails to complete the deal, albeit it is not Fitch's base case assumption, its 'BB' rating will face downward pressure, hence the Rating Watch Evolving. Key Rating Drivers Acquisition Pending Approval: ENN EC has announced it will acquire the 32.80% stake held by ENN Group International Investment Limited (EGII) and Essential Investment Holding Company Limited in ENN Energy for a total consideration of CNY25.84 billion. ENN EC plans to swap 9.97% of its shares in Australian liquefied natural gas (LNG) company, Santos Limited, which is held by wholly owned subsidiary United Faith Ventures Limited, for an equivalent value of CNY7.09 billion in ENN Energy shares held by EGII. The remainder will be financed by cash of CNY5.50 billion and issuance of 1,341 million new ENN EC shares at CNY9.88/share, amounting to a total value of CNY13.25 billion. ENN EC plans to sell up to 246 million new shares in a private placement to no more than 35 investors to fund part of the CNY5.50 billion cash consideration. The deal proposal has been submitted to the China Securities Regulatory Commission (CSRC) and is pending approval from the commission. ENN EC has replied to the first batch of questions from the CSRC. Valuation of the transaction will remain unchanged and valid until end-June 2020, despite the share price volatility of ENN EC, Santos Limited and ENN Energy. Fitch thinks it is likely that the deal will be completed in 2020. Weakened Standalone Credit Profile: Fitch expects the coronavirus-related impacts and low commodity prices to weigh materially on ENN EC's 'BB' rating, if the deal fails. ENN EC's funds from operations (FFO) adjusted net leverage improved to 3.4x in 2019, from 4.0x in 2018, largely driven by strong dividend income. This is unlikely to be sustained over the medium-term due to weaker oil and methanol prices. We expect ENN EC's average methanol selling price to further drop, by 11% in 2020, after averaging 23% lower in 2019, as a result of both the oil price crash and the coronavirus-related toll on demand. We forecast ENN EC's FFO adjusted net leverage to rise to 5.5x in 2020 before deleveraging to 4.4x in 2021. Moderate or Strong Linkage: If the transaction is completed, the linkage between ENN EC and ENN Energy, based on our Parent and Subsidiary Rating Linkage, is likely to be 'Moderate' or higher as it will be underpinned by Mr Wang's effective control of ENN Energy via his shares in ENN EC as well as the synergies realised along the gas value chain as a result of the deal. ENN EC's construction-engineering business also supports ENN Energy's gas expansion and integrated energy projects. As a result, Fitch may assess ENN EC based on the consolidated group profile. Strong Combined Credit Profile: ENN Energy's strong performance in 2019 has kept the pro forma consolidated credit profile strong, despite ENN EC's cyclical weakness. ENN Energy's EBITDA rose by 20.8% to CNY9.1 billion, driven by solid gas sales growth and a sharp rise in revenue from integrated energy and value-added businesses. ENN Energy's retail gas sales volume rose by 14.7% to 19.9 billion cubic metres in 2019 and remained resilient amid the coronavirus outbreak with only a 5% decline in the first two months of 2020. The pro forma consolidated group credit profile will benefit from lower business risks due to stable cash flows from ENN Energy's city-gas projects. Diversification between commodity and defensive utility sectors can help the combined group better weather cyclical volatility - for example, the weak oil price hurts ENN EC's profitability through methanol price exposure but will be compensated by ENN Energy's lowering of gas-procuring costs. We forecast FFO adjusted net leverage of the combined group at 3.0x in in 2020 and 2.7x in 2021 assuming no share placement, which will support the consolidated group credit profile at close to ENN Energy's rating level. Derivation Summary ENN EC's rating is supported by its business diversification, with operational benefits from being part of the ENN group, and a moderate financial profile. The rating is constrained by the company's evolving business profile and exposure to cyclical sectors with higher business risks. We expect ENN EC's net leverage to rise to 5.5x in 2020 due to the temporarily weak commodity prices and recover to 4.4x in 2021. ENN EC is rated on a par with Indonesia-based PT Chandra Asri Petrochemical Tbk (CAP, BB-/Stable), whose ratings reflects its parent PT Barito Pacific Tbk's (B+/Stable) diversified businesses across the petrochemical and energy industries, its leading market position as Indonesia's largest petrochemical producer, and a strong record of geothermal operation with long-term contracts driving stable revenue. CAP has much lower leverage than ENN EC, but this is offset by ENN EC's stronger vertical integration and business diversification, as well as higher financial flexibility from its 10.07% stake in Santos. Key Assumptions Fitch's Key Assumptions Within Our Rating Case for the Issuer - Average methanol selling price to decline by 11% yoy in 2020 and rebound by 8% in 2021 and 5% in 2022; - Fitch's Qinhuangdao coal price deck of USD74/t in 2020, USD79/t in 2021 and USD78/t in 2022; - 5% yoy decrease in engineering revenue in 2020 before mild growth from 2021; - Annual capex of around CNY650 million-750 million in the next few years. RATING SENSITIVITIES Factors that could, individually or collectively, lead to positive rating action/upgrade: - Fitch may take positive rating action on ENN EC if the proposed transaction with ENN Energy is completed in accordance with the proposed terms, after which we are likely to assess ENN EC based on the consolidated credit profile of the group. Factors that could, individually or collectively, lead to negative rating action/downgrade: - If the transaction with ENN Energy fails to be completed, we would remove ENN EC's ratings from RWE and take negative rating action if its FFO adjusted net leverage stays above 3.5x for a sustained period, its EBITDA margin is sustained below 15% over the next three years, or there is deterioration of the financing or liquidity position of ENN EC's controlling shareholders and their related businesses. Best/Worst Case Rating Scenario Ratings of non-financial corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit www.fitchratings.com/site/re/10111579.
Liquidity and Debt Structure Adequate liquidity: The company has adequate liquidity as its cash and cash equivalents on hand of CNY2.4 billion and unused credit facilities of CNY4.2 billion can cover its short-term debt maturities of CNY3.3 billion at end-2019. In addition, ENN EC's 10.07% stake in Santos offers an additional liquidity buffer, if needed. Fitch believes ENN EC's options to refinance its USD500 million bonds due in February 2021 include issuance of new US dollar bonds, drawing down banking facilities, issuance of domestic medium-term note and bridge loans from banks. REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING The principal sources of information used in the analysis are described in the Applicable Criteria. ESG Considerations ESG issues are credit neutral or have only a minimal credit impact on the entity(ies), either due to their nature or the way in which they are being managed by the entity(ies). For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg. ENN Ecological Holdings Co., Ltd.; Long Term Issuer Default Rating; Rating Watch Revision; BB; RW: Evo ENN Clean Energy International Investment Limited ----senior unsecured; Long Term Rating; Rating Watch Revision; BB; RW: Evo Contacts: Primary Rating Analyst Michelle Leong, Director +852 2263 9611 Fitch (Hong Kong) Limited 19/F Man Yee Building 60-68 Des Voeux Road Central Hong Kong Secondary Rating Analyst Wei Yu, Director +86 21 6898 7983 Committee Chairperson Ying Wang, Managing Director +86 21 6898 7980
Media Relations: Alanis Ko, Hong Kong, Tel: +852 2263 9953, Email: alanis.ko@thefitchgroup.com; 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. 27 Mar 2020) (including rating assumption sensitivity) https://www.fitchratings.com/site/re/10111917 Corporates Notching and Recovery Ratings Criteria (pub. 14 Oct 2019) (including rating assumption sensitivity) https://www.fitchratings.com/site/re/10090792 Country-Specific Treatment of Recovery Ratings Rating Criteria (pub. 27 Feb 2020) https://www.fitchratings.com/site/re/10111386 Parent and Subsidiary Rating Linkage (pub. 27 Sep 2019) https://www.fitchratings.com/site/re/10089196 Applicable Model Numbers in parentheses accompanying applicable model(s) contain hyperlinks to criteria providing description of model(s). 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