OREANDA-NEWS. Fitch Ratings has assigned Sinofert Holdings Limited (Sinofert) Long-Term Foreign-Currency and Local-Currency Issuer Default Ratings of 'BBB+'. The Outlook is Stable. The agency has also assigned the China-based fertilizer company a senior unsecured rating of 'BBB+'.

KEY RATING DRIVERS

Rating Notched Down from Parent's: Fitch has notched Sinofert's IDR one level down from its 52.65% parent Sinochem Hong Kong (Group) Company Limited's (Sinochem HK) rating of 'A-' with Stable Outlook. This reflects Sinofert's strong linkages with Sinochem HK and is in line with Fitch's parent and subsidiary rating criteria. Sinochem HK's ratings are equalised with that of its parent Sinochem Group, which are two notches lower than China's sovereign ratings (A+/Stable). The one-notch rating difference between Sinofert and Sinochem HK also reflects the fact that some of Sinochem Group's strategically important agrochemical and chemical assets in pesticides, seeds and rubber are not owned by Sinofert. The Stable Outlook on Sinofert reflects our expectation that its parents will continue to provide support for Sinofert.

Sinochem Group plays an important role in the entire value chain of China's agrochemical industry, especially in R&D for seeds. The group is crucial to the development of the country's agriculture sector. The group also has strong state linkages in its rubber and other chemical operations, and contributes to the state's strategic oil reserves.

Pivotal for Fertilizer Supply: Sinofert is one of the largest importers, distributors and manufacturers of fertilizer in China, in terms of revenue and volume. Fertilizer supply is crucial for the development of China's agriculture sector and of strategic importance to the state. Sinofert accounts for about half of the country's imports of potash, an important fertilizer. Sinofert has for a long time played a leading role in China's price negotiations with global potash suppliers. In addition, Sinofert owns 8.94% of Qinghai Salt Lake Potash, the largest Chinese potash producer with the most domestic reserves. Sinofert expects to complete the acquisition of 15.01% in Qinghai Salt Lake Potash from Sinochem Corporation by end-2015.

Extensive Distribution Network: Sinofert operates over 2,100 distribution centres across China that cover 95% of domestic arable land. Through this network, Sinofert not only sells fertilizer and pesticides to farmers, but also promotes scientific fertilization and agricultural services to drive the development of modern agriculture. Soil enrichment, farming skill education, and agrochemical R&D are also government strategic tasks performed by Sinofert on a quasi-commercial basis in conjunction with the Ministry of Agriculture.

Leverage Increase Temporary: Sinofert's leverage, measured by FFO adjusted net leverage ratio, soared to 15.4x at end-2013 from 2.8x one year earlier. This is mainly due to the decline in profitability following weak demand in 2H13 and higher logistics costs. Furthermore, Sinofert's costs were heightened by its role in holding off-season fertilizer reserves under such market conditions. We expect its leverage to fall below 5.0x after 2015, mainly supported by more stable average selling prices as demand improves. Sinofert said in February 2015 that it was profitable in 2014, reversing its CNY476m loss in 2013.

KEY ASSUMPTIONS

Fitch's key assumptions within our rating case for the issuer include:
- Sinofert continues to have an important role in China's potash imports and production;
- Sinochem Group's operations in pesticides, seeds and rubber are not injected into Sinofert.

RATING SENSITIVITIES

Positive: Future developments that may, individually or collectively, lead to positive rating action include:
- Positive rating action on the Chinese sovereign
- Stronger linkages between Sinochem Group and the Chinese sovereign
- Stronger linkages between Sinofert and Sinochem HK

Negative: Future developments that may, individually or collectively, lead to negative rating action include:
- Negative rating action on the Chinese sovereign
- Weaker linkages between Sinochem Group and the Chinese sovereign
- Weaker linkages between Sinofert and Sinochem HK