OREANDA-NEWS. Fitch Ratings has today placed MIE Holdings Corporation's (MIE) 'B' Long-Term Issuer Default Rating, senior unsecured rating, and the ratings of MIE's USD200m notes due 2018 and USD500m notes due 2019, on Rating Watch Negative (RWN).

The rating action is in response to MIE's announced C\\$201.5 mil (approximately CNY947 mil) acquisition of a 43.9% interest in Long Run Exploration Ltd (Long Run), a Canada-based upstream oil & gas company, to be completed by November 30, 2015 subject to various approvals and satisfaction of various conditions precedent. The company is exploring various options to fund the transaction, including the introduction of strategic investors, equity issuance, existing asset disposals and debt issuance. In addition to the initial consideration, a further C\\$99.2 mil payment will be required if the 18- and 24-month warrants acquired as part of the transaction are exercised.

KEY RATING DRIVERS
Limited Rating Headroom: Weak oil prices have significantly reduced MIE's rating headroom. Fitch had expected the company's funds from operations (FFO) net leverage to increase to above 5x in 2015 (2014: 2.7x) without the acquisition of Long Run and had projected little rating headroom under the negative rating guidelines for its B ratings of FFO net adjusted net leverage of more than 3x and FFO gross interest coverage of less than 4.5x in the medium-term. (For more details see Fitch's rating Action Commentary on MIE dated 01 April 2015)

Funding Structure for Acquisition Key: Based on available information, it appears that Long Run is an asset with good medium-term potential. The target company's production (in barrels of oil equivalent) and reserves are larger than MIE's and it had a proved and proved-developed reserve life of 9.1 years and 5.3 yrs as at December 2014, giving some flexibility on capex. However, given the prevailing low oil price environment, and the need to reduce debt at Long Run, meaningful dividend receipts are unlikely in the short- to medium-term. Fitch notes that Long Run commenced its first dividend payment in February 2014, and has suspended such payments in February 2015 in view of the tough market conditions.

MIE has indicated in its announcement that Long Run will be consolidated in its financial statements if it proceeds with the transaction as per the structure and shareholding indicated in its announcement. However, given the partial equity ownership in Long Run and the substantial debt at Long Run, Fitch will focus on dividends from Long Run in its analysis of MIE's credit risk profile. As such, how MIE funds this acquisition is key to how the transaction will affect MIE's overall credit profile and its ratings.

Any substantial additional debt to fund this acquisition or sale of a sizable cash contributing asset will be viewed by Fitch as negative to MIE's credit profile, especially given the low rating headroom. MIE can reduce the negative credit impact if it funds a material portion of the cash consideration via the issue of equity or if it involves strategic co-investors for the acquisition of Long Run.

Significant Refinancing Risks Ahead: MIE has significant refinancing risks in 2018 and 2019 upon the maturity of its USD700m of notes. Fitch will also review the implications for MIE's refinancing risk pursuant to completion of the transaction and how it is funded.

Recovery Ratings: MIE's senior unsecured rating and the USD notes are rated at the same level as MIE's IDR. While noting that MIE currently has adequate headroom under its RR4 recovery ratings, on completion of the Long Run transaction, Fitch will also review if there has been a material weakening of recovery prospects for MIE's unsecured creditors from the sale of existing assets or the addition of incremental debt.

Resolution of RWN: Fitch will resolve the Negative Rating Watch once the transaction is consummated and the funding structure for both the initial payment and the exercising of warrants has been confirmed by the company.

KEY ASSUMPTIONS
Fitch's has used the following key assumptions for MIE's existing operations:
- Oil prices in line with Fitch's base case price deck as outlined in the "Fitch Oil and Gas Assumptions Summary", dated 11 February 2015
- Total production volume at consolidated entities to decline by 30%-40% in 2015 and gradually increase afterwards on the assumption that the Kazakhstan central processing facility for debottlenecking is completed by mid-2016
- Working capital conversion cycle to remain stable
- Capex of CNY600m-700m in 2015 for MIE's existing operations

RATING SENSITIVITIES
Negative: Future developments that may, individually or collectively, lead to a negative rating action include:
- a weakening of credit risk profile following the consummation of the Long Run transaction which may arise from material additional debt and/or lower operating cash flows;
- heightened re-financing risk
- for the senior unsecured ratings, the transaction resulting in weaker than average recovery prospects for senior unsecured creditors of MIE

Positive: The ratings may be affirmed if MIE funds the purchase consideration for Long Run in a manner that does not materially weaken its credit risk profile.