OREANDA-NEWS. Fitch Ratings has assigned Baosteel Resources International Company Limited's (BRI; BBB+/Stable) USD500m 3.875% senior notes due January 2020 a final 'A-' rating. BRI is 100% owned by Baosteel Group Corporation (BGC; A-/Stable), and is mainly engaged in trading, investment and development of natural resources. The notes are issued by BRI's wholly owned subsidiary Baosteel Financing 2015 Pty Limited and are guaranteed by BRI.

The final rating is in line with the expected rating assigned on 15 January 2015 and follows the receipt of final documents conforming to information already received.

Net proceeds from the issue will mainly be used for refinancing, capital expenditure and/or working capital and other general corporate purposes

KEY RATING DRIVERS
Notes Rated at Same Level as BGC: The notes are rated at the same level as BGC because it has granted an investment and keepwell deed and a liquidity support covenant deed to ensure that the issuer, Baosteel Financing 2015, and BRI have sufficient assets and liquidity to meet their respective obligations for the proposed notes.

The investment and keepwell deed serves as a channel for BGC to provide liquidity to the issuer and BRI when needed through an equity interest purchase or shareholders' loan or a combination thereof. In addition, as part of the investment and keepwell deed, BGC and BRI undertake that BRI will remain the only overseas resource development platform for BGC, and BGC will appoint all or the majority of senior management of BRI, manage and supervise the businesses of BRI, and use its best efforts to support the business operations of BRI, strengthening operational linkage between the two.

Ratings Linked to Parent's: In line with the top-down approach in its Parent and Subsidiary Rating Linkage criteria, Fitch has notched BRI's IDR one level below its sole owner BGC's to reflect the very strong operational and strategic linkages between the two companies. The Stable Outlook reflects Fitch's expectation the parent will continue to support BRI.

BGC's 'A-' ratings benefit from a one-notch uplift from its standalone ratings of 'BBB+' due to its moderately strong linkages with the Chinese state, in line with Fitch's Parent and Subsidiary Rating Linkage criteria.

Steel is necessary for the industrialisation and urbanisation of China and Baosteel Group is among China's key steel companies spearheading high-tech steel product development. As the largest and financially strongest steel enterprise held by the State-owned Assets Supervision and Administration Commission of the State Council, BGC is strategically important in China's drive to develop its steel industry. As a result, the Chinese government can be expected to support the company, should the need arise.

Only Offshore Resource Development Platform: BRI is the only offshore resource development platform for BGC. BGC aims to become a vertically integrated steel producer with a 50% of raw material self-sufficiency ratio, and BRI has been designated by the group to meet this target through acquisitions, investments and development of overseas mining assets. BGC has, in the past, provided BRI asset injections, shareholders' loans and equity injections to support resource project acquisitions and developments.

Offshore Fund Management Platform: BRI is the only offshore centralised fund management and financing platform for BGC (excluding Baoshan Iron & Steel Co., Ltd. (A-/Stable)). In addition, BRI's current bank credit facilities of USD4.7bn are backed by BGC's letters of comfort. BRI is BGC's only subsidiary to receive such support.

Overseas Trading Platform: BRI also acts as BGC's overseas trading platform and procures raw materials, including iron ore and coking coal, for BGC's steel operations and third parties. In 2013, 49% of BRI's trading revenue came from BGC and approximately 96% of BRI's iron ore sales volume went to BGC.

Mining Asset Execution Risks: Fitch believes that there are execution risks in BRI's future mining project developments because the company has limited experience in resource development.

RATING SENSITIVITIES
Negative: Future developments that may, individually or collectively, lead to negative rating actions include:
- Negative rating action on BGC
- Weakening linkages between BRI and BGC

Positive: Future developments that may, individually or collectively, lead to positive rating action include:
- Positive rating action on BGC
- Strengthening linkages between BRI and BGC

For the ratings of BGC, the following sensitivities were outlined by Fitch in its Rating Action Commentary dated 14 November 2014:

Negative: Future developments that may, individually or collectively, lead to negative rating actions include:
- Weakening linkage with the State
- Sustained decline in metal spreads (gross profit per ton of steel product sold) below CNY400
- FFO-adjusted net leverage exceeding 3.0x on a sustained basis

Positive: Although Fitch does not envisage taking positive rating action in the next 12-18 months, future developments that may, individually or collectively, lead to positive rating action include:
- substantial improvement in the steel industry via consolidation and easing raw material constraints
- improved business profile in terms of product leadership across more industries and geographic expansion while maintaining a strong financial profile
- consistent free cash flow generation