OREANDA-NEWS. Fitch Ratings has placed China's leading steelmaker's, Baosteel Group Corporation (Baosteel Group), Long-Term Foreign - and Local-Currency Issuer Default Ratings (IDR) and senior unsecured rating of 'A-' on Rating Watch Evolving (RWE). This follows this week's announced restructuring between Baosteel Group and Wuhan Iron and Steel Group (WISCO), another large Chinese steelmaker.

At the same time, the 'A-' ratings on Baoshan Iron & Steel Co. Ltd's (Baosteel) Long-Term IDR, senior unsecured rating and the outstanding senior unsecured US dollar notes issued by Bao-Trans Enterprises Ltd (Bao-Trans), a wholly owned subsidiary of Baosteel, have also been placed on RWE.

Baosteel's ratings are equalised with those of its parent, Baosteel Group, due to their strong operational and strategic linkages.

KEY RATING DRIVERS

On 26 June 2016, Baosteel Group and WISCO announced that they would undergo a joint "strategic restructuring". Wholly owned by China's central State-owned Assets Supervision and Administration Commission (SASAC), WISCO is China's sixth-largest steel producer by output and the eleventh-largest in the world, producing close to 26 million tonnes of crude steel in 2015. The company is also China's leading silicon steel producer.

Uncertain Rating Outcome: The RWE reflects uncertainty over the outcome of Fitch's reassessment of the linkage between the restructured group and SASAC, as well as the standalone rating of the restructured group.

Weaker Financial Metrics: Fitch believes the restructured group will have weaker financial metrics due to WISCO's highly levered financial profile, which could weigh on Baosteel Group's standalone credit assessment of 'BBB+'.

Baosteel Group's net-debt/EBITDA ratio averaged around 3.5x-4.0x historically, with the exception of financial year end December 2015, when it was close to 8.0x due to an industry-wide trough. The company has substantial financial assets of close to CNY77bn, which mitigate risks associated with increased leverage. Net-debt/EBITDA generally stays below 2.0x (FY15: around 3.5x) if 75% of available-for-sale financial assets marked to market are included in the calculation. WISCO's leverage is much higher, with net-debt/EBITDA averaging around 8.5x-9.0x. Combining the two companies directly would financially burden the restructured group, with net-debt/EBITDA, including adjusted financial assets, likely to have averaged around 3.0x-3.5x, based on historical financials.

Marginally Better Business Profile: The restructured group's business profile could strengthen, with total crude steel production exceeding 60 mtpa, from Baosteel Group's current production of 35 mtpa, making the restructured group the world's second-largest steel producer. The restructured group would also see increased market share of high-value-added steel products due to its leading position in silicon steel and steel sheets used in China's auto-industry.

Potentially Stronger Linkage: The proposed restructuring potentially signals stronger linkage with the state, as we deem it to be state-directed. Baosteel Group's ratings are currently notched-up one level from its standalone credit profile to reflect moderately strong linkages with the Chinese state (A+/Stable), in line with Fitch's Parent and Subsidiary Linkage methodology. A change in our assessment of the linkages could result in an increased number of uplift notches.

RATING SENSITIVITIES

The RWE will be resolved when Fitch completes its review of the restructured group. We will downgrade the ratings if we conclude Baosteel Group's standalone rating is weaker and the linkage between Baosteel Group and SASAC is not enhanced. An upgrade is probable if Fitch deems Baosteel Group's standalone rating as remaining unchanged and that the linkage between Baosteel Group and SASAC has strengthened. Another possibility is for the ratings to be affirmed if Baosteel Group's standalone profile is downgraded by the same number of notches as the increase in notches accorded for greater linkage with SASAC.