Fitch Downgrades China Fishery to 'B-'; On Rating Watch Negative

China Fishery

15/10/2015 10:02

(The following statement was released by the rating agency)

HONG KONG, October 15 (Fitch) Fitch Ratings has downgraded China Fishery Group 
Limited's (China Fishery) Long-Term Foreign-Currency Issuer Default Rating (IDR) 
and its senior unsecured rating to 'B-' from 'B+'. At the same time, Fitch has 
placed China Fishery's ratings of 'B-' on Rating Watch Negative (RWN). 

The downgrade reflects the high risk that China Fishery's liquidity will be 
inadequate because of the volatility in the company's operating cash flows as a 
result of weather changes. China Fishery's high proportion of short-dated debt, 
which poses refinancing risk from time to time, continues to reflect the 
company's lack of a systematic and transparent approach in financial management 
processes.

Fitch has placed the rating on RWN because China Fishery is facing short-term 
liquidity pressure. The RWN will be resolved once there is further clarity on 
the outcome of ongoing discussions between China Fishery and its bankers. If the 
company's liquidity deteriorates further, it may result in further rating 
downgrades. If its debt maturity profile improves, Fitch will reassess the 
ratings, and take into account China Fishery's future liquidity gap and 
financial profile.

KEY RATING DRIVERS

Liquidity Risk: China Fishery's short-term bank loan amounted to USD299m at 
end-June 2015. On 8 October 2015, the company announced that it has commenced 
discussions with lenders on additional financing and supplements and amendments 
in respect of its borrowings. If the short-term debt maturities are not 
adequately addressed, China Fishery could face a liquidity crunch. 

Fitch estimates that the company's cash on hand and inventory sales can at best 
provide only USD150m. Its total allowable catch is likely to be poor over the 
next six to twelve months because the El Nino weather effect this season is one 
of the strongest on record. As a result, Fitch expects free cash flow generation 
to be weak and cash balance to be low for the financial year to end-September 
2016 (FY16), which may lead to a liquidity shortfall of up to USD300m. 

Escalating Leverage: Fitch expects net leverage, as measured by adjusted net 
debt/EBITDAR, to remain above 5.0x in the next 18 months and not fall below 4.0x 
until FY18. The worsening financial profile, with EBITDA dwindling to about 
USD150m and free cash generation to USD70m, will further limit China Fishery's 
financial flexibility. China Fishery had net debt of USD828m and net leverage of 
4.9x at end-June 2015.

Fishmeal Business Supports Ratings: Fitch expects China Fishery's Peruvian 
fishmeal segment to account for over 70% of China Fishery's EBITDA from 2015. 
The Peruvian fishmeal operation supports China Fishery's ratings, given the firm 
demand for fishmeal, which is a staple needed for aquaculture globally. The 
Copeinca business that China Fishery acquired has demonstrated the ability to 
generate positive free cash flow over weather cycles. Furthermore, the company's 
fleet operation, which provides supporting services to fishing vessels, has been 
generating positive EBITDA since FY14, reversing from two consecutive years of 
losses. Fitch expects this segment to generate USD18m EBITDA in 2015, 
contributing to about 15% of the group's total EBITDA, and remain profitable.

KEY ASSUMPTIONS

Fitch's key assumptions within our rating case for the issuer include:

- Dividend payments to resume from FY16 at 30% payout ratio

- Maintenance capex of USD30m a year

- Oil prices and bunker costs to remain at current levels

RATING SENSITIVITIES

If China Fishery's liquidity worsens, its ratings will be further downgraded. If 
it is able to improve its debt maturity profile, Fitch will revisit the credit 
and establish new rating sensitivities.

Contact: 

Primary Analyst

Vicki Shen

Associate Director

+852 2263 9918

Fitch (Hong Kong) Limited

19F, Man Yee Building

68 Des Voeux Road Central, Hong Kong

Secondary Analyst

Su Aik Lim

Senior Director

+852 2263 9914

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 - Including Short-Term Ratings and Parent and 
Subsidiary Linkage (pub. 17 Aug 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869362

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