OREANDA-NEWS. September 14, 2015. Fitch Ratings has upgraded China-based Bright Food (Group) Co., Ltd.'s (BFG) Long-Term Issuer Default Rating (IDR) and senior unsecured rating to 'A-' from 'BBB-.' It has also upgraded the rating of the senior notes issued by BFG's indirect wholly owned subsidiary Bright Food Hong Kong Limited and guaranteed by BFG to 'A-' from 'BBB-.' All ratings have been removed from Rating Watch Evolving. The Outlook is Stable.

The rating upgrades followed Fitch's reassessment of the linkage between Shanghai's State-owned Assets Supervision and Administration Commission (Shanghai SASAC) and BFG, which resulted in a change of BFG's rating methodology from bottom up to top down based on Fitch's Parent and Subsidiary Rating Linkage Methodology. BFG's 'A-' rating is now credit linked to that of Shanghai SASAC.

KEY RATING DRIVERS
Strengthened Linkage with Shanghai SASAC: BFG's linkage with Shanghai SASAC has strengthened significantly following the state-administered zero-cost injection of Shanghai Liang You Group (LY) in May 2015. The asset injection, reflecting the intent of Shanghai SASAC to consolidate state-owned food and agricultural resources under its remit, is strong evidence of government support and further enhances BFG's strategic position in food production, supply and distribution, and quality control. Post the asset injection, BFG will be responsible for managing more than 80% of the policy grain reserves and 100% of the policy edible oil reserves in Shanghai. The asset injection of LY also extends BFG's value chain in upstream grain cultivation and sourcing, logistics and transportation, and downstream retail distribution.

Competitive SOE with Pivotal Role: Although BFG is classified as a competitive SOE by Shanghai SASAC, it is of critical importance to the livelihood of Shanghai residents and social stability as the city's main "food basket." BFG carries a highly strategic mandate in securing sufficient and reliable food supply and stabilizing local food prices when necessary. The group holds a dominant market position in food supply, including an around 70% market share of green vegetables supply, 90% of fresh dairy supply, 70% of sugar supply and 35% of pork supply in Shanghai. The group also employs about 100,000 workers in Shanghai. Shanghai SASAC is fully committed to maintaining a 100% stake in BFG given its strategic mandate.

High Financial Leverage: BFG's standalone credit profile is assessed in the low-BB level, constrained by consistent negative FCF and high financial leverage. FFO adjusted net leverage rose to 7.3x from 5.8x at end-2013. BFG acquired a 76.7% stake in Tnuva, the largest dairy producer in Israel for about EUR1bn in H12015. The group is planning to raise up to CNY13bn in equity proceeds via its publicly listed subsidiaries in 2015 to partially alleviate its debt burden. However, we expect leverage to remain high at close to 7.0x at end-2015. While it is possible that BFG's pace of outbound M&A may slow down in the coming years as management focuses on post-M&A integration, we expect BFG to remain opportunistic to capture reliable and good quality agri-food resources at attractive valuations.

Property Unit to be Self-funded: BFG injected its property business into one of its publicly listed subsidiaries Shanghai Haibo Co.,Ltd in 2015. The property business, considered to be non-strategic to the group, will have a limited operating scale and will source funding on its own rather than drawing resources from BFG in the future.

KEY ASSUMPTIONS
Fitch's key assumptions within the rating case for BFG include

- Around 20% revenue growth in 2015 driven by the acquisition of Tnuva and LY
- Revenue growth falling to 9% - 12% in 2016 - 2018
- Modest recovery in EBITDA margin to be in line with 2013 level
- CNY13bn of equity placements proceeds from three publicly listed subsidiaries in 2015 - 2016
- CNY18bn in capex including Tnuva investment and acquisition of intangible assets in 2015; capex/revenue of 4% beyond 2015

RATING SENSITIVITIES
Positive: Future developments that may, individually or collectively, lead to positive rating action include:
-A positive rating action is likely upon an upgrade of Fitch's internal assessment of the creditworthiness of the Shanghai Municipality.

Negative: Future developments that may, individually or collectively, lead to negative rating action include:
-A negative rating action could follow a lowering of Fitch's internal assessment of the creditworthiness of the Shanghai Municipality, or upon evidence of a weakening of BFG's legal, operational and strategic linkages with the Shanghai Municipality.