Chalco has “adequate” liquidity, as our criteria define the term, largely due to ongoing government support in the form of access to funding from commercial banks and domestic capital markets due to its state-owned-enterprise status. We expect that Chalco will be able to increase debt to finance operating deficits and capital expenditure. Our liquidity assessment does not factor in any capital injections from its parent or the government.
We expect the company’s liquidity sources, including cash and equivalents, to cover more than 1.2x of its liquidity uses in the next 12 months. Our liquidity assessment incorporates the following factors and assumptions:
-- Liquidity sources in the next 12 months include cash and equivalents of about RMB11 billion as of Dec. 31, 2011, our FFO projection of about RMB4.5 billion, pre-approved facilities from China National Association of Financial Market Institutional Investors of about RMB26 billion, uncommitted bank facilities of RMB38 billion (Chalco has about RMB 76 billion unused bank facilities as of June 30,2012--we include half of it), and about RMB50 billion cash inflow from bank loans and bond issuances in the first half of 2012.
-- Liquidity uses include short-term debt of RMB48.6 billion as of Dec. 31, 2011, maturing in the next 12 months, working capital requirements of RMB8 billion and capital expenditure of about RMB20 billion.
-- We expect liquidity sources to exceed its uses even if EBITDA drops by 15%.
The negative outlook reflects our view that the aluminum industry in China and globally will take time to recover from its current low prices and installed overcapacity. We don’t expect Chalco’s operating performance to materially improve over the next year. We believe the company’s performance may deteriorate further if demand remains soft and electricity costs stay at the current level.
We may lower the rating if: (1) industry conditions remain weak in the second half of 2013 with no visibility on recovery; (2) Chalco’s business risk profile deteriorates due to lower operating efficiency; (3) ongoing or extraordinary support from the government appears to wane; or (4) banks signal a cutback on providing loans to the company. A downgrade trigger could be EBITDA interest coverage falling below 1.0X and staying there for more than two quarters.
The rating upside potential is limited. However, we could revise the outlook to stable if the industry recovers and Chalco’s profitability improves because of higher operating efficiency, such that EBITDA interest coverage is 1.5x for a prolonged period.
Related Criteria And Research
-- Standard & Poor’s Standardizes Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011
-- Rating Government-Related Entities: Methodology And Assumptions, Dec. 9, 2010
-- Stand-Alone Credit Profiles: One Component Of A Rating, Oct. 1, 2010
-- Methodology And Assumptions On Risks In The Mining Industry, June 23, 2009
-- Criteria Methodology: Business Risk/Financial Risk Matrix Expanded, May 27, 2009
-- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008