Elion Resources Group Co. Ltd. Downgraded To 'B-' From 'B' On Weak Liquidity; Outlook Negative

  • We expect Elion Resources to face large liquidity deficits in the next 12 months. The company has high short-term maturities and its cash balances will likely continue to decline.
  • The China-based ecology restoration E&C company's results for the first nine months of 2018 are largely in line with our expectation. However, we believe risks to our 2019-2020 forecasts are on the downside, given slowing infrastructure and property markets in China.
  • We are therefore lowering the long-term issuer credit rating on the company to 'B-' from 'B'.
  • The negative outlook reflects our view that the company's unrestricted cash may continue to drop due to tight funding conditions that will limit refinancing options.
HONG KONG (S&P Global Ratings) Dec. 17, 2018--S&P Global Ratings said today 
that it had lowered its long-term issuer credit rating on Elion Resources 
Group Co. Ltd. to 'B-' from 'B'. The outlook is negative. 

We downgraded Elion Resources because we expect the company to face a 
significant liquidity deficit over the next year due to its large short-term 
debt maturities. Moreover, Elion Resources has limited refinancing options and 
relies on rollover of loans.

The company's debt structure continues to skew heavily toward the short-term. 
Elion Resources has Chinese renminbi (RMB) 18.6 billon debt due in the 12 
months ending Sept. 30, 2019, accounting for about 60% of its total debt. This 
figure includes two bonds totaling RMB3.1 billion that are due in 2020 and 
2021 but have put options that can be exercised in March 2019. Approximately 
half of the company's short-term debt is bank borrowings, which we expect can 
be renewed at maturity. However, it is not clear whether the trust loans or 
financial leases (over 40% of total debt) can be similarly rolled over.

At the same time, Elion Resources could find it difficult to raise new debt 
under the current tight funding environment in China. So far in 2018, Elion 
had to rely on its own cash to repay commercial paper, medium-term notes, and 
bonds. As a result, its unrestricted cash declined to RMB5.7 billion as of 
Sept. 30, 2018, from RMB8.0 billion at end-2017.

New debt issuance has been hard for non-investment grade private Chinese 
companies in the past year, and it will likely remain the case for least in 
the next six months, in our view. With no concrete debt issuance plan in place 
yet, we expect Elion Resources' unrestricted cash to further decline as it 
repays bonds due over the next 12 months.

Elion Resources' results for the first nine months are generally in line with 
our expectation. However, the infrastructure engineering and construction 
(E&C) industry is facing intense competition and project pipelines are slowing 
down with the government pushing for deleveraging. The Chinese property 
investments and sales are also slowing down. A further weakening in industry 
conditions could pose risks to our revenue and cash flow forecast. It may also 
affect the company's ability to roll over its bank loans or trust loans.

The negative outlook reflects our view that Elion Resources' liquidity may 
weaken further over the next 12 months. The company's unrestricted cash will 
likely continue to shrink and its debt maturity profile may shorten if its 
access to capital market remains constrained. The outlook also reflects our 
view that the company's E&C and property businesses may be hurt if project 
pipelines slow due to China's decelerating fixed asset investments and slowing 
property market.

We would lower the rating on Elion Resources if the company's capital 
structure becomes unsustainable, such that it will need to depend on favorable 
business and financial conditions to meet financial obligations. Indications 
of such a situation could be the company becoming increasingly dependent on 
short-term debt, experiencing difficulty in rolling over bank loans or 
refinancing, or facing much higher borrowings costs. 

We could also downgrade the company if its cash flow and financial metrics are 
materially weaker than our forecasts, with a low likelihood of significant 
recovery, possibly due to lower revenue or weaker working capital management 
than we estimate.

We may revise the outlook to stable if Elion Resources can reduce reliance on 
short-term debt and maintain more evenly spread debt maturities, while 
securing funding for its upcoming debt. In such a scenario, the company would 
face no significant shortfall in liquidity on an ongoing basis.
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