OREANDA-NEWS. April 20, 2015. Fitch Ratings has downgraded China Fishery Group Limited's (China Fishery) Issuer Default Rating (IDR) to 'B+' from 'BB-'. The agency has also downgraded the ratings on China Fishery's wholly owned subsidiary Copeinca AS and its wholly owned subsidiary Corporacion Pesquera Inca SAC (together referred to as Copeinca) to 'B+' from 'BB-'. The Outlooks on the ratings are Stable. A full list of rating actions is at the end of this commentary.

The downgrade reflects the lack of a systematic and transparent approach in the company's financial management processes, especially the financing of the Copeinca acquisition. The company would need greater financial flexibility to mitigate this risk. Copeinca's ratings are equalised with China Fishery because of strong operational and strategic ties and in line with Fitch's parent-subsidiary linkage methodology. Copeinca contributed to about 41% of China Fishery's total EBITDA for the financial year ended 28 September 2014 (FY14).

Fitch will withdraw Copeinca's ratings and will not provide any more coverage on the company once its USD250m bond is fully repaid.

KEY RATING DRIVERS
Lack of Systematic Financial Management: The amount of time China Fishery has taken to resolve its financing issues created uncertainty among its stakeholders and this is likely to affect the company's future financial strategies. China Fishery explored at least three other options and rejected them due to high costs or timing issues. It finally settled on a rights issue currently being offered that may raise up to SGD282.5m (equivalent to USD210m) to refinance the outstanding USD250m Copeinca bonds, which would have been credit positive, if the company had systematically presented and executed its financing plan when it acquired Copeinca in August 2013. That this option is the last resort does not reflect strong financial management control. The refinancing of the Copeinca bonds is a condition necessary to allow Copeinca to provide a guarantee for the syndicated loans China Fishery had drawn upon to finance the acquisition.

Business Profile Remains Resilient: Fitch expects China Fishery's Peruvian fishmeal segment to account for over 80% of China Fishery's EBITDA from 2015. The Peruvian fishmeal operation supports China Fishery's ratings, given the firm demand for fishmeal, which is a staple needed for aquaculture globally. This supports higher fish prices when the catch volume is low, thus compensating for the volatility in catch volumes, which depend on climate conditions, and limiting the fluctuations in China Fishery's EBITDA.

The fleet operation has also turned in positive EBITDA of USD5m in FY14, reversing the USD19m of losses in FY13. Fitch believes this segment continued to be profitable in 1Q15 and expects this segment to remain profitable.

Leverage Remains High: Fitch expects China Fishery to continue de-leveraging, but leverage, as measured by adjusted net debt/EBITDAR, will not fall below 2.75x until FY17, limiting its financial flexibility. Fitch expects the company to generate free cash flow of about USD150m a year, including the effects of refunds of prepayments made to Russian suppliers as part of a long-term supply agreement (LSA). China Fishery had net debt of USD1.08bn and leverage of 4.35x at end-FY14.

KEY ASSUMPTIONS
Fitch's key assumptions within our rating case for the issuer include:
- Dividend payments to resume from FY16 at 30% payout ratio
- Maintenance capex of USD30m a year
- Oil prices and bunker costs to remain at current levels

RATING SENSITIVITIES
Negative: Future developments that may, individually or collectively, lead to negative rating action include:
- Adjusted net debt/EBITDAR sustained above 3.5x even with the full refund of the LSA prepayments
- Any negative development in the Peruvian operation resulting in a sustained decline in catch volumes
- China Fishery's fleet operation suffers sustained negative EBITDA
- Any issues arising that prevent the full refund of the LSA prepayments

Positive: Future developments that may, individually or collectively, lead to positive rating action include:
- Better track record of disciplined financial management
- Adjusted net debt/EBITDAR is sustained below 2.75x
- Consistent and sustained improvement in the fleet operation's EBITDA

As Copeinca's ratings are linked to China Fishery, any change in China Fishery's ratings will result in an equivalent change in Copeinca and Corporacion Pesquera Inca's ratings.

Full list of rating actions:

China Fishery Group Limited
Long-Term IDR downgraded to 'B+' from 'BB-'; Outlook Stable
Senior unsecured rating downgraded to 'B+' from 'BB-'; Recovery Rating at 'RR4'
USD300m senior unsecured notes issued by CFG Investment S.A.C. and guaranteed by China Fishery downgraded to 'B+' from 'BB-'; Recovery Rating at 'RR4'

Copeinca AS
Long-Term IDR downgraded to 'B+' from 'BB-'; Outlook Stable

Corporacion Pesquera Inca SAC
Long-Term IDR downgraded to 'B+' from 'BB-'; Outlook Stable
USD250m senior unsecured notes downgraded to 'B+'; Recovery Rating at 'RR4'