OREANDA-NEWS. Fitch Ratings has affirmed COFCO (Hong Kong) Limited's (COFCO HK) Long-Term Issuer Default Rating (IDR) at 'A-' and senior unsecured rating at 'A-'. The Outlook is Stable. Fitch also affirmed the ratings on three note issues at 'A-': the USD500m notes due 2018, and the USD500m notes due 2023, both issued by Prosperous Ray Limited and guaranteed by COFCO HK; and the USD800m notes due 2019, issued by Double Rosy Limited, guaranteed by Joy City Property Limited and credit enhanced by a keepwell deed and a deed of equity interest purchase undertaking from COFCO HK.

Fitch applied a top-down approach via the agency's Parent and Subsidiary Linkage criteria to rate COFCO HK's IDR one level below that of its sole owner COFCO Corporation (COFCO) due to its very strong operational and strategic linkages with COFCO. COFCO's credit level is in turn assessed by notching down one level from China's Long-Term IDR (A+/Stable), to reflect the very close linkage between COFCO and State-owned Assets Supervision and Administration Commission (SASAC). COFCO is the largest vertically integrated trader and supplier of agricultural and food products and services in China, and is 100%-owned by the sovereign via SASAC.

KEY RATING DRIVERS
Strategic Position Unchanged: COFCO acquired 51% of Nidera and Nobel Agri Limited (NAL), two leading global agricultural products traders, in 2014. Those two overseas acquisitions demonstrate its role as the Chinese government's key policy tool for ensuring food security for the country. NAL and Nidera's global supply-chain systems and origination capabilities complement COFCO's domestic logistics, processing, and distribution network. COFCO's moves fit the Chinese government's strategy to secure supplies of agricultural products from sustainable and diversified sources.

Consolidator of Agri-Food industry in China: The Chinese government has appointed COFCO to take the lead in consolidating the agri-food industry through acquiring or absorbing smaller or inefficient market players. SASAC injected China Grain & Logistics Corporation (CGL) into COFCO in 2013 and announced in November 2014 it planned to inject into COFCO state-owned China Huafu Trade and Development Group Corp.(Huafu), which holds the country's reserves of foods such as sugar and meat. COFCO is one of only two enterprises owned by the central government that are involved the agriculture/food industries, and the only one covering the full value chain.

Strong Parent/Subsidiary Linkage: COFCO HK accounted for 58% of COFCO's total revenue, 54% of total assets, and 57% of EBITDA in 2013. COFCO has absolute management control over COFCO HK, including a centralised treasury management. COFCO HK is also positioned by COFCO as its platform for globalisation and diversifying into non-agriculture related sectors (except financial services). In 4Q14, COFCO group completed the injection of all its commercial properties into Joy City Property Limited, a 67.03% owned subsidiary of COFCO HK that was previously known as COFCO Land.

High Leverage: Fitch estimated that COFCO HK's FFO-adjusted net leverage to be relatively high at end-2014. This is mainly due to high capex and working-capital requirements, including those related to the property development and agri-food processing segments, and two major overseas acquisitions in 2014. COFCO HK acquired Nidera, NAL and six Joy City property projects from COFCO during 2014, but only consolidated the earnings from these in 4Q14, which resulted in a temporary distortion of net leverage for 2014. The company has indicated it has no major acquisition plans in the short to medium term and will focus on consolidating all the acquired assets to bring in synergies, which would reduce leverage.

KEY ASSUMPTIONS
Fitch's key assumptions within our rating case for the issuer include:
- Linkage with parents remains strong
- Financial forecasts for 2014 and 2015 factor in the Nidera and NAL acquisitions, and the Huafu consolidation. Revenue increases in the mid-double digits organically after 2015.
- EBITDA margin remains below 5% into 2017
- Annual capex of about HKD8bn with very modest M&A activity in next three years
- Deleveraging after 2014 will be supported by EBITDA contribution from an enlarged asset base and lower capex and acquisition budget going forward

RATING SENSITIVITIES
Negative: Future developments that may, individually or collectively, lead to negative rating actions include:
- Negative rating action on the Chinese sovereign
- Weakening of the linkages between COFCO HK and COFCO
- Weakening of the linkages between COFCO and the Chinese sovereign
Positive: Future developments that may, individually or collectively, lead to positive rating action include:
- Positive rating action on the Chinese sovereign
- Strengthening of the linkages between COFCO and the Chinese sovereign
- Strengthening of the linkages between COFCO HK and COFCO, specifically, the injection of other core assets including COFCO Agri-Trading & Logistics and China Grains Logistics Corporation by COFCO into COFCO HK may result in the removal of the one-notch difference between the ratings for COFCO HK and the assessment for COFCO.