OREANDA-NEWS. Fitch Ratings has upgraded China National Bluestar (Group) Co, Ltd's (Bluestar) Long-Term Issuer Default Rating to 'BBB+' from 'BBB-' and its senior unsecured ratings to 'BBB+' from 'BBB-'. The Outlook for the IDR is Stable.

Fitch also has upgraded the ratings on the USD500m 3.5% senior notes due 2018 and the USD500m 4.375% senior notes due 2020 issued by Bluestar Finance Holdings Limited to 'BBB+' from 'BBB-'. Bluestar Finance Holdings Limited is a wholly owned subsidiary of Bluestar and the notes are guaranteed by Bluestar.

The upgrade follows a revision in Fitch's views of the linkages between Bluestar's parent, China National Chemical Corporation (ChemChina), and the Chinese sovereign (A+/Stable). Following a detailed review of ChemChina's business, Fitch has concluded that it is of greater strategic importance to China because of its contribution to China's crop protection sector, leadership in chemical material supply to national aerospace projects and its role of championing the specialty chemical industry in China. Bluestar's ratings remain linked to that of ChemChina due to strong legal, operational and strategic ties between the two entities.

KEY RATING DRIVERS

Parental Linkage Drives Ratings: Bluestar's ratings remain linked to that of its parent, ChemChina, which effectively holds a 63.58% stake. Bluestar consistently receives guarantees from ChemChina for a significant portion of its loans. As of end-September 2015, 65% of Bluestar's loans were guaranteed by ChemChina. Moreover, Bluestar carries out businesses in all of ChemChina's core segments, and operates as a major overseas platform for the parent.

Government Links Enhance ChemChina's Profile: ChemChina, which is 100% owned by the government and administrated by the State-owned Assets Supervision and Administration Commission of the State Council (SASAC), is responsible for enhancing China's crop-protection sector, a crucial link in agricultural output and food safety. It is China's largest and the world's seventh-largest producer of crop-protection chemicals. ChemChina has the strongest ability among the state enterprises under SASAC to improve the weak crop-protection sector in China, particularly after it successfully acquired in 2010 a 60% stake in ADAMA, a leading off-patent crop-protection producer.

ChemChina also has a significant market share in providing chemical material for China's national aerospace projects. The company has strong technology and expertise in the field, because it was established on the basis of the former Ministry of Chemical Industry's core companies, which have strong R&D capabilities and technical know-how. ChemChina has had the most success among chemical-related state-owned enterprises in overseas M&As. It has made seven major overseas acquisitions since 2006, which all have strong synergies with ChemChina's businesses.

Leading Positions in Core Businesses: Bluestar is the market leader in various specialty chemical segments - including organic silicon products, nutritional science and environmental science. These sectors are characterised by significant concentration and high barriers to entry, and generated 52% and 79% of Bluestar's revenue and gross profit, respectively, in 2014.

Improving Leverage: Fitch expects Bluestar's financial leverage to continue to decline as capex will remain low. Leverage has been high over the past few years due to several large overseas acquisitions and high capex, but FFO-adjusted net leverage fell to 10.0x by end-2014 from 16.8x in 2013. This was driven mostly by a reduction in capex and an improving operating environment for its core business segments, where the EBITDA margin widened to 11.4% from 8.8%. In 1H15, operating EBITDA margin expanded to 16.9% from 8.4% in 1H14, mainly due to improvement at its Nutritional Science segment. Capex dropped 10% yoy to CNY1.2bn in 1H15.

KEY ASSUMPTIONS

Fitch's key assumptions within our rating case for the issuer include:
- significant reduction in capex
- operating margin remains in line with the historical average in 2015-2016, with steady improvement from 2017 and beyond driven by better market fundamentals
- no dividend payout for the next three years.

RATING SENSITIVITIES
A revision of Fitch's internal assessment of the creditworthiness of ChemChina would likely to lead to a rating action on Bluestar. Negative action would be likely if Bluestar's legal, operational and strategic linkages with ChemChina were to weaken.