OREANDA-NEWS. Fitch Ratings has downgraded MIE Holdings Corporation's (MIE) Long-Term Issuer Default Rating to 'CCC' from 'B-'. With the downgrade, the ratings have been removed from Negative Watch. Simultaneously, the ratings of its senior unsecured USD200m notes due 2018 and USD500m notes due 2019 have also been downgraded to 'CCC' from 'B-'. The Recovery Ratings on the notes remain at 'RR4'.

The rating downgrade reflects the challenges MIE faces in refinancing its outstanding notes due between February 2018 and April 2019, which represent the majority of its debt obligation, even though near-term liquidity pressure has declined. We expect it will be difficult for MIE to use the cash proceeds from completed and planned asset sales to purchase assets at a discount, as the agency expects the oil price to see further moderate rises over the next few years. This potentially challenges the company's ability to improve its operating scale and profile through acquisitions.

In addition, we expect MIE to generate negative FCF after interest payments and maintenance capex in the next 18-24 months. Adjusting for cash-burn from interest expense and capex, we expect the company to only have around USD250m of cash reserves by the time the USD200m notes fall due in early 2018.

KEY RATING DRIVERS

Asset-Base Rebuilding Challenging: Fitch believes the improving oil price limits MIE's ability of using acquisitions to improve its operating profile and rebuild its asset-base, following major asset disposals. The oil price has steadily risen from around USD30 per barrel at the start of 2016 to settle at around USD45 per barrel in the last few months. We expect the oil price to gradually increase to around USD65 per barrel in 2019, based on Fitch's oil-deck assumptions. The improving oil price reduces the likelihood of MIE acquiring large assets at a discounted valuation.

No Immediate Liquidity Risks: Near-term liquidity pressure has declined, as MIE has disposed all of its stake in Asia Gas & Energy (AGE) for around USD195m (net of the cost from acquiring the non-controlling interests), which holds its 51% stake in Sino Gas & Energy Limited. The company is also looking to realise around USD175m from selling a 60% interest in Palaeontol B. V., which holds its Emir-Oil operations in Kazakhstan; the majority of this sale would be realised in 2016. In addition, MIE has renewed a CNY400m short-term senior secured credit facility with China Construction Bank Corporation (A/Stable), with approximately CNY238m available as at end-June 2016. Fitch estimates MIE has an available cash balance of approximately CNY896m (USD135m), including the post-1H16 announced cash movements.

The current cash pool and credit facility could cover the company's annual interest expenses of over CNY300m. We expect annual capex on its remaining China operations of around CNY30m-40m per year in 2016 and 2017.

Restricted Cash Generation Ability: MIE's production declined in 1H16 and the company also cut capex due to the depressed average realised oil price, resulting in lower annualised EBITDA from continuing operations of approximately CNY147m in 2016 (2015: CNY330m). Following the completion of the sale of AGE and Palaeontol, MIE's only remaining major asset will be its two legacy Chinese oil production sharing contracts in Daan and Moliqing. We expect production from these assets to be around 5,000-6,000 barrels of oil a day (boepd) (1H16: 6,029 boepd), with proven and probable reserves limited to around 24 million barrels. MIE's only other operating asset is in the US, and it is loss-making and of minimal scale.

High Debt Obligations: The proceeds from MIE's asset sales will be insufficient to support the refinancing of its outstanding notes. The company's total debt is approximately CNY4.6bn (USD700m), comprising mainly of the USD200m notes due 2018, USD476m notes due 2019 (MIE purchased USD24m from the market in 1H16) and CNY162m (USD24m) of secured short-term debt. MIE's remaining asset-base will be too small to support the company's debt stock, even after adjusting for cash proceeds from the asset sales, which could be potentially used to service a part of its debt obligations.

Rating of US Dollar Notes Threatened: The Recovery Rating of 'RR4' on MIE's senior unsecured notes is based on the remaining asset base after the disposals. This includes a 40% residual interest in Emir-Oil, should the transaction be completed. According to MIE's 2019 bond indenture, the company is required to deploy all proceeds from asset disposals to either repay senior debt, make asset-replacement acquisitions or for non-maintenance capex. MIE is obliged to make an offer to repurchase the bonds using any unutilised receipts after 360 days of receiving the money. We have given some credit to these cash proceeds in assessing the Recovery Rating of the US dollar notes due to these limitations on using cash on hand. However, there is limited headroom under its RR4 ratings - a significant increase in prior ranking debt or higher-than-expected cash burn, among other things, can adversely affect this rating.

KEY ASSUMPTIONS

Fitch's key assumptions within our rating case for the issuer include:

- oil prices in line with Fitch's base-case price deck, as outlined in Corporate Oil Price Assumption Raised for 2016; Slow Recovery From Here, dated 27 July 2016

- working-capital conversion cycle to remain stable

- completing the disposal of Emir-Oil

- maintenance capex for remaining China operations.

RATING SENSITIVITIES

Negative: Developments that may, individually or collectively, lead to negative rating action include:

- MIE not having a credible plan for refinancing its 2018 and 2019 maturing US dollar bonds before the end of 1Q17

- failure to maintain adequate liquidity.

Positive: We do not expect positive rating action until MIE satisfactory addresses its refinancing risks and achieves an operating and financial profile commensurate with a 'B-' rating.