Fitch Affirms China Fishery's Ratings; Outlook Negative

China Fishery

26/03/2014 09:31

(The following statement was released by the rating agency)

HONG KONG/SINGAPORE, March 26 (Fitch) Fitch Ratings has affirmed China Fishery 
Group Limited's (China Fishery) Long-Term Issuer Default Rating (IDR) and its 
senior unsecured rating at 'BB-'. The outlook remains negative. The USD300m 
senior unsecured notes issued by CFG Investment S.A.C. and guaranteed by China 
Fishery have also been affirmed at 'BB-'.

The affirmation follows an improvement of China Fishery's business profile after 
its acquisition of Copeinca ASA (Copeinca, 'B+'/Stable) making it the leading 
anchovy fishmeal producer in Peru. Its recovery of the prepayments for the 
long-term supply agreement (LSA) in Russia has also addressed the risk of 
suffering substantial losses in this investment in the event of negative 
regulatory influence on its contract supply business.

Risk to its operations remains as the full repayment of the LSA prepayment will 
only conclude by April 2016. China Fishery's fleet performance has also been 
erratic since it started operating in 2011. Finally, the outlook can be 
stabilised only after the company has deleveraged and achieved  an adjusted net 
debt/EBITDAR of below 3.0x.

KEY RATING DRIVERS

Strengthened Business Profile: Fitch estimated that the Peruvian fishmeal 
segment will be contributing close to 80% of China Fishery's EBITDA after the 
termination of the LSA. The is because the contract supply business will become 
a spot purchase business with very thin trading margins and this segment used to 
contribute about 65% of China Fishery's EBITDA. Although the change reduces 
China Fishery's earnings diversity, it can lessen the uncertainty posed by 
regulatory changes that may result in substantial losses in this operation. The 
refocus of China Fishery's operations to Peru is also a positive given the firm 
demand for fishmeal, which is a staple needed for aquaculture globally.

This is evident in the strong price increases of Peruvian fishmeal and fish oil 
as a result of significantly lower total allowable catch (TAC) for Peru 
anchovies for the fishing season starting in November 2012. Prices of Peruvian 
fishmeal at end-March hit a record USD2,200 per metric ton compared with between 
USD1,200 and USD1,600 in 2012. As a result China Fishery's H113 EBITDAR margin 
rose to 45% versus 40% for 2012. For the financial year ending 28 September 2013 
(FY13), China Fishery's Peruvian fishmeal segment (excluding Copeinca) only saw 
a 5% yoy decline in EBITDA versus a 25% drop in revenue.

Leverage Remains High: Fitch expects China Fishery's leverage to exceed 3.0x in 
FY14 and FY15 following its Copeinca acquisition and the termination of the LSA 
prepayments. Pro-forma FY13 leverage including Copeinca full-year contribution 
would have been 4.1x. Following the LSA termination, China Fishery's FY14 
leverage may be reduced to below 3.5x (net debt offset by the outstanding LSA 
repayment) if management persists with deleveraging. China Fishery's ability to 
generate positive free cash flow of about USD90m from FY15 can help the company 
reduce its leverage to below 3.0x by FY16.

RATING SENSITIVITIES

Negative: Future developments that may, individually or collectively, lead to 
negative rating action include:

- adjusted net debt/EBITDAR is sustained above 3x even with the full repayment 
of the LSA prepayments

- the China Fishery fleet operation continues to show volatile performances and 
suffer losses

- any issues arising to obstruct the full repayment of the LSA prepayments

Positive: The current rating is placed on Negative Outlook. As a result, Fitch's 
sensitivities do not anticipate developments with a material likelihood, 
individually or collectively, of leading to a rating upgrade. However, if all 
the above negative factors do not happen, then the Outlook may revert to Stable

Contact: 

Primary Analyst

Su Aik Lim

Director

+65 6796 7233

Fitch Ratings Singapore Pte Ltd

6 Temasek Boulevard

#35-05 Suntec Tower Four

Singapore 038986

Secondary Analyst

Vicki Shen

Associate Director

+852 2263 9918

Committee Chairperson

Kalai Pillay

Senior Director

+65 6796 7221

Media Relations: Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: 
wailun.wan@fitchratings.com.

Additional information is available at www.fitchratings.com.

Applicable criteria, "Corporate Rating Methodology", dated 5 August 2013, are 
available at www.fitchratings.com.

Applicable Criteria and Related Research: 

Corporate Rating Methodology: Including Short-Term Ratings and Parent and 
Subsidiary Linkage

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=715139

Additional Disclosure 

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http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=825056

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