Reuters: Financial Services and Real Estate: TEXT-S&P Revises Fufeng Outlook To Negative; Afrms 'BB' Rating

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TEXT-S&P Revises Fufeng Outlook To Negative; Afrms 'BB' Rating Mar 30th 2012, 03:55 Thu Mar 29, 2012 11:55pm EDT (The following was released by the rating agency) Overview -- Fufeng's profitability is likely to remain weak in the first half of 2012, and we have limited visibility over the likelihood of a recovery. -- Refinancing risk could increase for Fufeng's US$150 million convertible bond. -- For these reasons, we are revising our rating outlook on the China-based manufacturer of corn-based biochemical products to negative from stable. -- We are also affirming the 'BB' corporate credit rating on Fufeng and on its senior unsecured notes. Rating Action On March 30, 2012, Standard & Poor's Ratings Services revised its rating outlook on Fufeng Group Ltd. to negative from stable. At the same time, we affirmed the 'BB' long-term corporate credit rating on Fufeng and the 'BB' issue rating on the company's senior unsecured notes. Standard & Poor's also lowered its Greater China credit scale ratings on Fufeng and on the company's notes to 'cnBB+' from 'cnBBB-'. Fufeng is a China-based manufacturer of corn-based biochemical products. Rationale We revised the rating outlook on Fufeng to reflect our view that the company's profitability is likely to remain weak for at least the first half of 2012, following a deterioration in 2011. We have limited visibility over the potential for Fufeng's margins and profits to recover, given its current pricing strategy and volatility in raw material costs. A negative outlook signals at least a one-in-three probability of a downgrade over the next 12 months. Fufeng's margins could remain under pressure in 2012 because of its low prices. The company's pricing strategy is aimed at driving away smaller players so that the market is more likely to absorb the increased capacity of monosodium glutamate (MSG) produced at its new plant in northeast China. Fufeng's financial performance deteriorated in the second half of 2011 because of its reduced average selling price and a surge in the cost of raw materials, such as corn and coal. Fufeng's EBITDA margin in the second half of 2011 dropped more than we expected to 10.5% (2011: 13.1%), and its ratio of total debt to EBITDA was about 3.7x (2011: 3.3x). In our base-case scenario, Fufeng could maintain a debt-to-EBITDA ratio of less than 3.5x for 2012 if its margins improve to more than 11%, keeping the company above our threshold for a downgrade. Our assessment is based on the company's current sales volume and cost estimates. Fufeng's profitability could begin to strengthen in the second half of 2012 if raw material costs stabilize and the company increases its prices. Otherwise, the rating could come under downward pressure. The terms of Fufeng's US$150 million convertible bond will also weigh on the rating in 2012 by adding to its liquidity pressure. Holders have the option to require Fufeng to buy back the bond in April 2013. Fufeng's strong domestic market position in MSG, its good operating efficiency, and established distribution network support the current rating. The company's history of prudent operating and financial management is an additional strength. Liquidity We believe Fufeng's liquidity will remain "adequate" to cover its needs in the next 12 months, unless the company does not have a concrete refinancing plan in place over the next few months to repay the convertible bond. If no plan materializes, its liquidity position could quickly become "less than adequate". Our assessment of Fufeng's liquidity profile incorporates the following expectations and assumptions: -- The company's sources of liquidity, including cash, funds from operations, and available facilities, will exceed its uses by 1.2x or more over the next 12 months. -- Net sources will remain positive even if EBITDA declines more than 15%. -- Fufeng's cash on hand and cash flow from operations are sufficient to meet committed capital expenditure, working capital needs, debt repayments, and dividend payouts over the next 12 months. As of Dec. 31, 2011, Fufeng has unrestricted cash of about Chinese renminbi (RMB) 614 million with RMB704 million short-term debt due. We have not factored any major acquisitions into the ratings. Outlook The negative outlook reflects our expectation that company's financial performance will remain weak for at least the first half of 2012, following a deterioration in 2011. We also believe that refinancing risk could increase in 2012 as the maturity date of its US$150 million convertible bond approaches. We may lower the rating by one notch if: (1) Fufeng's margins and profitability do not improve in 2012 and show no signs of recovery, causing its ratio of total debt to EBITDA to exceed 3.5x; or (2) its liquidity position weakens. This could happen if the company materially increases its capital expenditure or working capital, or fails to execute a refinancing plan to redeem its convertible bond. We could revise the outlook to stable if the company restores its profitability and increases its prices while maintaining an "adequate" liquidity position by securing a refinancing plan to redeem its convertible bond. Link this Share this Digg this Email Reprints

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