OREANDA-NEWS. Fitch Ratings has placed China Shanshui Cement Group Limited's (Shanshui) 'B+' Long-Term Issuer Default Rating (IDR), its senior unsecured ratings and ratings of all its outstanding bonds of 'B+' with recovery ratings of 'RR4' on Negative Watch. The Negative Watch reflects the possibility of Shanshui running into insolvency in the event that it is forced to redeem the USD500m 7.5% senior notes due 2020 (2020 notes) if its chairman Mr. Zhang Bin is removed or the majority of its board members is changed.

This follows the announcement on 19 June 2015 that the company has received a requisition notice from some shareholders (owning 10.07% of the company) for an extraordinary general meeting (EGM) to (1) remove all but one existing non-executive director (including the chairman) and (2) appoint to the board seven new directors, most of them carrying out executive duties in China Tianrui Group Cement Company Limited (Tianrui). These key management changes may result in a downgrade of multiple notches of Shanshui's ratings to a level below 'B-'. To change the chairman, more than 50% of Shanshui's shareholders' votes are required.

KEY RATING DRIVERS

Inadequate Liquidity to Redeem All Bonds: Based on the preliminary assessment by Shanshui, the proposed removal of directors including the removal of Mr. Zhang Bin as chairman, would trigger the change of control (CoC) event under the 2020 notes. It would also lead to the company being required to make an offer to repurchase all outstanding notes (including both the 2016 Notes and the 2020 Notes) with a total amount of over USD921m within 30 days. Shanshui believes that it would not have enough cash to complete these redemptions within the limited timeframe and will result in its default.

EGM Result Uncertain: The outcome of the EGM is uncertain as it is initiated by the largest shareholder Tianrui with 28.16% ownership. Tianrui will need support from either one of the other two major shareholders - Taiwan's Asia Cement Corporation (ACC, 20.9%) and CNBM (16.67%) and the minority shareholders to achieve its intended outcome. As the proposed outcome may harm shareholders' interests if this leads to Shanshui's insolvency, it is not clear if Tianrui can find support for its proposal. Fitch believes ACC and CNBM are in a position to protect their investments in Shanshui if maintaining its operations is aligned with their business interests.

China Shanshui Investment which owns 25.09% of Shanshui is 38.45% owned by Shanshui's executive director Zhang Caikui (the father of Mr. Zhang Bin, chairman and executive director), 43.29% kept by receivers, and 18.26% owned by minorities. As the receivers do not have the rights to alter the composition of Shanshui's board of directors, China Shanshui Investment will likely not support Tianrui's proposed change of board members.

Business Fundamentals Remain Strong: Shanshui's ratings are supported by its business, which continues to operate and generate cash. Its business, which generates a 19.9% EBITDA margin, holds a leading market position in Shandong province. Fitch's recovery analysis indicates that the replacement value of Shanshui's production facilities that totalled around CNY27bn can cover 100% of its onshore and offshore debt.

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:
- the EGM is called and voted to remove the chairman resulting in a forced redemption of the 2020 notes

Positive: Future developments that may, individually or collectively, lead to the rating watch being removed, and Stable Outlook being assigned include:
- The EGM does not proceed or the chairman is not removed and no other conditions resulting in a forced redemption of the 2020 notes exist, for example no shareholders own more than 30%
- No significant increase in working capital funding and/or banks continue to extend debt to the company
- The employee dispute with Mr. Zhang does not result in material deterioration in the company's operations