OREANDA-NEWS. Fitch Ratings has downgraded China Shanshui Cement Group Limited's (Shanshui) Long-Term Issuer Default Rating (IDR) and senior unsecured rating to 'BB-' from 'BB'. The ratings have also been placed on Rating Watch Negative.

The downgrade is driven by our view that the current weak cement price in Shanshui's core markets will persist, and affect the company's ability to improve its financial performance. The Rating Watch Negative follows a public announcement that parties related to China Tianrui Group Cement Company Ltd (Tianrui) have purchased a 28.16% stake in Shanshui, a situation that could lead to Shanshui being obliged to repurchase USD400m of its offshore notes, which could weaken its liquidity.

KEY RATING DRIVERS

High Leverage to Continue: Shanshui's high leverage is unlikely to improve in 2015, based on the continued weak cement prices and sales volumes in1Q15 in Shanshui's major markets. Fitch does not expect Shanshui's leverage ratio to fall below 4x in 2015 in the current market environment. The average sales price (ASP) for cement in Shandong province, Shanshui's core market, declined 6% yoy to CNY275/tonne in 1Q15 from CNY293/tonne a year ago. Cement ASP in Liaoning province also declined 4% yoy to CNY310/tonne in 1Q15.

Change of Control May Hurt Liquidity: On 15 April 2015, Tianrui announced that its chairman, Mr. Li Liufa, and parties acting in concert, had increased their stake in Shanshui to 28.16%. Mr. Li is now Shanshui's largest shareholder.

This might trigger the "change-of-control" clause in Shanshui's outstanding USD400m notes due 2016. The clause would require Shanshui to make an offer to repurchase all of its outstanding 2016 notes at 101% of the principal amount plus accrued and unpaid interest within 30 days of the change of control. The company had a cash balance of only CNY1.15bn (USD186m) at end-2014, although it is likely to be able to draw on bank facilities to fund the bond repurchase if needed. However, the repurchase would significantly weaken its financial flexibility.

Tianrui's Intention Not Clear: Tianrui is also a major cement producer and is a key competitor to Shanshui in Liaoning. A coordination of Tianrui and Shanshui's operations in overlapping markets could lead to lower regional price competition. However, it is not clear if Mr. Li expects to participate in Shanshui's operations and strategic direction after becoming its largest shareholder.

KEY ASSUMPTIONS

Fitch's key assumptions within our rating case for the issuer include:
- Cement ASPs in Shanshui's main markets do not improve;
- Total capex (including acquisitions) between 2015-2017 no higher than CNY3bn;
- The company is able to roll over short-term debt

RATING SENSITIVITIES

Negative: Future developments that may, individually or collectively, lead to negative rating action include:
- Shanshui is forced to redeem the 2016 notes early and its liquidity worsens.

Positive: Future developments that may, individually or collectively, lead to the rating watch being removed, and Stable Outlook being assigned include:

- Shanshui is not forced to redeem the 2016 notes early and its liquidity is not impacted.
- No further deterioration in Shanshui's operating environment.
- No material negative change to Shanshui's operations following the change in shareholding structure.