OREANDA-NEWS. Fitch Ratings has downgraded China Shanshui Cement Group Limited's (Shanshui) Long-Term Issuer Default Rating (IDR) and senior unsecured ratings to 'B+' from 'BB-'. The ratings have been removed from Rating Watch Negative, where they were placed on 19 April 2015 due to pressure on the company's liquidity after a change in controlling shareholders triggered an obligation to make an offer to repurchase USD400m (CNY2.5bn) of offshore notes. The Outlook has been revised to Negative because the average selling prices for cement in Shanshui's core markets remain weak, and we do not expect the company's financial metrics to improve in the near term.

The downgrade is driven by our view that a recent employee dispute and change in shareholders have negatively affected the company's operations and that its liquidity will continue to be under pressure beyond 2015, even though Fitch believes Shanshui has adequate liquidity to meet its current debt obligations.

In April 2015, parties related to China Tianrui Group Cement Company Ltd (Tianrui) increased their stake in Shanshui to 28.16%. This triggered the "change-of-control" clause in Shanshui's outstanding 8.5% USD400m notes due 2016 (2016 notes). Shanshui offered to repurchase such notes on 8 May 2015 and it expects to announce the tender offer results on 2 July 2015.

Separately, on 20 May 2015, the High Court of Hong Kong allowed the application for the appointment of receivers over a total of approximately 43.29% shareholding of China Shanshui Investment, which holds approximately 25.09% of the issued share capital of Shanshui. The court's decision followed lawsuits by some employees of Shanshui disputing the ownership of certain shares in China Shanshui Investment. According to the company's announcement on 9 June 2015, the employee dispute has resulted in: 1) suspension of new loans and certain outstanding unutilised credit facilities from some financial institutions; 2) tighter credit policy by certain suppliers and contractors; and 3) the intention of certain joint-venture partners to review their relationships with the company.

KEY RATING DRIVERS
Liquidity Under Pressure: Shanshui's liquidity will be under pressure after it uses its cash reserves in repurchasing the 2016 notes, if the notes are all tendered, and due to uncertainty over its access to credit facilities from banks. Shanshui will be able to fund the repurchase of the 2016 notes with CNY1.15bn cash at end-2014, the net USD100m it obtained from issuing 2020 notes and redeeming its 2017 notes, and the CNY1.4bn-2bn cash flow from operations Fitch expects Shanshui to generate. However, the company has CNY1.75bn short-term bank borrowings due this year, and part of that will have to be refinanced.

Operations Hurt By Uncertainty: Uncertainty about the position of Shanshui's executive director, Mr. Zhang Caikui, who is a defendant in the lawsuits filed by some employees, may create concerns about Shanshui's management changes. This has impacted Shanshui's operations negatively as some suppliers have tightened trade finance terms; and some joint venture partners have said they would review their ties with the company. The company is entering its peak season in the third quarter, which may alleviate short-term operational concerns, but its current management has little time to work with all its stakeholders to address their respective concerns.

Major Shareholders' Support Likely: Shanshui's ratings are supported by its business, which continues to operate and generate cash. Its business, which generates a 19.9% EBITDA margin and holds a leading market position in Shandong province, remains attractive to major shareholders not involved in the dispute. These include parties related to Tianrui (28.16% ownership), Taiwan's Asia Cement Corporation (20.9%) and CNBM (16.67%) who are all key industry participants. Although these three shareholders may have different objectives, together they owned over 65% of Shanshui, and are in a position to protect their investments in the company given their influence in the industry.

KEY ASSUMPTIONS
Fitch's key assumptions within our rating case for the issuer include:

- Average selling prices of cement 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:

- Increase in working capital funding or banks not willing to continue extending debt, resulting in liquidity pressure
- The employee dispute with Mr. Zhang resulting in material deterioration in its operation
- The employee dispute creating concerns over the composition of the company's top management that will remain unresolved for a prolonged period.

Positive: The current rating is on Negative Outlook. Fitch does not anticipate developments with a material likelihood, individually or collectively, of leading to a rating upgrade. However, if the above factors do not materialise, then the Outlook may revert to Stable.