Yingde Gases Group Co. Ltd. Upgraded To 'B+' On Improving Leverage, Financial Discipline; Outlook Stable

  • We expect Yingde's leverage to remain relatively low due to its good operating performance and disciplined capex over the next 12 months.
  • We also expect PAG's financial policy with regard to Yingde to not materially deviate from the current practice of maintaining a fairly prudent investment appetite, as restricted by its bond covenants.
  • We are raising our issuer credit rating on Yingde and the issue rating on the company's guaranteed notes to 'B+' from 'B'.
  • The stable outlook reflects our expectation that Yingde's leverage will remain stable over the next 12 months supported by its favorable operations and disciplined capital spending, including acquisitions.
HONG KONG (S&P Global Ratings) Dec. 6, 2018--S&P Global Ratings said today it 
had raised its long-term issuer credit rating on Yingde Gases Group Co. Ltd. 
to 'B+' from 'B'. The outlook is stable. We also raised our issue rating on 
the company's guaranteed senior unsecured notes due in 2020 and 2023 to 'B+' 
from 'B'. Yingde is an industrial gas supply company in China. 

The upgrade reflects our view that Yingde's leverage will remain relatively 
low over the next 12 months, underpinned by its sound operating performance 
and disciplined capital expenditure (capex). We also expect private-equity 
firm PAG's financial policy with regard to Yingde to not materially deviate 
from the current practice of maintaining a fairly prudent investment appetite, 
as restricted by its bond covenants. 

In our view, Yingde's net ratio of debt to EBITDA will remain below 2.5x over 
the next 12 months, consistent with the company's target. We expect Yingde to 
continue to generate strong cash flows, underpinned by its stable average 
selling price and an enlarged customer base owing to organic growth and 
acquisitions. In addition, we anticipate that Yingde will maintain organic 
capex at below Chinese renminbi (RMB) 2 billion a year as it keeps its 
expansion prudent. The company's 2018 interim result has demonstrated robust 
year-on-year growth in revenue with stable profitability. Yingde's 
debt-to-EBITDA ratio decreased to 2.3x as of June 30, 2018, from 3.5x at the 
end of 2016.

Despite our expectation that Yingde will strengthen its credit metrics with a 
widened financial buffer, our view remains unchanged that the financial 
sponsor ownership constrains our financial risk assessment on the company. We 
base our financial policy assessment on our belief that there is risk of 
increasing leverage over the long term because financial sponsors typically 
follow an aggressive financial strategy to maximize shareholder returns. 

Yingde has had a smooth transition to a new management team after the 
privatization by PAG, by maintaining relationships with existing customers and 
growing by securing new customers. The new management team's strategy of 
expanding in merchant business has also helped to diversify the revenue base 
and improve profitability. In addition, PAG has assisted Yingde to optimize 
its capital structure, including extending its debt maturity profile by 
issuing U.S. dollar notes in January 2018 and replacing deposit-based loans to 
release restricted cash.

We expect Yingde to maintain its good position in the niche on-site industrial 
gas supply market in China. Despite the continuous effort of diversifying its 
client base to non-steel industries, such as chemicals, new materials, and new 
energy, the company's business will remain constrained by its high customer 
concentration risk in the steel industry, which is subject to de-capacity 
drives.

The stable outlook reflects our expectation that Yingde's leverage will remain 
stable over the next 12 months supported by the company's favorable operations 
and disciplined capital spending, including acquisitions. We expect Yingde to 
maintain its good position in the niche on-site industrial gas supply market 
in China over the period. Our rating factors in the need for some financial 
buffer, given the company is owned by a financial sponsor.

We may lower the rating if Yingde's debt-to-EBITDA ratio rises to above 3.5x 
on a sustained basis. This could happen if: (1) the company undertakes 
aggressive expansion of new projects, debt-funded acquisitions, or 
debt-financed dividends; or (2) its profitability materially weakens because 
of a deterioration in operations due to a poor market environment.

We could raise the rating if the financial sponsor, PAG, continues to 
demonstrate strong financial discipline with prudent financial policies with 
regard to Yingde such that we believe Yingde can maintain its current low 
leverage on a sustainable basis.