China Steel Corp (中鋼) yesterday saw its credit ratings cut by a local ratings agency amid concerns over its financial risk profile.
Taiwan Ratings Corp (中華信評) lowered its long-term corporate credit rating and unsecured corporate bond issue rating on China Steel to “twAA+” from “twAAA,” the agency said in a press release.
“The downgrade action reflects our expectation that a slow recovery in cash-flow generation and rising debt for capacity expansion will limit China Steel’s credit protection measures below our previous expectations over the next two years,” the local arm of Standard & Poor’s Ratings Service said.
The company used to boast strong credit fundamentals. However, because of its proposed debt-funded capital expenditures over the next two years to finance the construction of two blast furances at its subsidiary, Dragon Steel Corp (中龍), “China Steel will be unable to maintain its solid capital structure,” it said.
In the first half of the year, China Steel posted a net loss of NT$6.45 billion (US$197 million), compared with a net profit of NT$26.9 billion a year earlier, after it saw revenue dropped to NT$73.28 billion from NT$124.32 billion over the same period because of falling market demand.
Under Taiwan Ratings’ estimate, China Steel’s financial leverage would rise over the next two years, with its debt-to-capital ratio likely increasing to above 40 percent, from 36 percent at the end of June.
As the company enjoys a dominant market position in Taiwan and an above-level cost position and operating efficiency, however, China Steel’s profitability would improve along with a market recovery and allow the company to maintain a modest financial risk profile throughout business cycles,” Taiwan Ratings said.
As a result, the agency affirmed its “twA-1+” short-term rating on the steelmaker, with a “stable” outlook on its long-term rating, the release said.
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