OREANDA-NEWS. January 19, 2016. Fitch Ratings has affirmed COFCO (Hong Kong) Limited's (COFCO HK) Long-Term Issuer Default Rating (IDR) at 'A-' and senior unsecured rating at 'A-'. The Outlook is Stable.

Fitch also affirmed the ratings on the following notes at 'A-': the USD500m notes due 2018 and the USD500m notes due 2023, both issued by Prosperous Ray Limited and guaranteed by COFCO HK; and the USD800m notes due 2019 issued by Double Rosy Limited, guaranteed by Joy City Property Limited and credit enhanced by a keepwell deed and a deed of equity interest purchase undertaking from COFCO HK.

Fitch applied a top-down approach via the agency's Parent and Subsidiary Linkage criteria to rate COFCO HK's IDR one level below that of its sole owner COFCO Corporation (COFCO) due to its very strong operational and strategic linkages with COFCO. COFCO's credit level is in turn assessed by notching down one level from China's Long-Term IDR (A+/Stable), to reflect the very close linkage between COFCO and the State-owned Assets Supervision and Administration Commission (SASAC). COFCO is the largest vertically integrated trader and supplier of agricultural and food products and services in China, and is 100%-owned by the sovereign via SASAC.

KEY RATING DRIVERS

Strategic Position Unchanged: COFCO's acquisition of the remaining 49% stake in agriculture-products trader Noble Agri Limited (Noble Agri) affirms the company's strategic role in China's food security. Fitch believes the purchase complements COFCO's domestic logistics, processing, and distribution network, and fits the Chinese government's strategy of securing supplies of agricultural products from sustainable and diverse sources.

Consolidator of Agri-Food Industry: COFCO has been appointed as a consolidator of China's agri-food industry by the Chinese government. In 2015, the state assets management ministry injected state-owned China Huafu Trade and Development Group Corp., which holds the country's reserves of foods, into COFCO. Fitch believes that the government may inject more assets into COFCO.

Strong Parent/Subsidiary Linkage: COFCO has said it is grooming the Hong Kong unit into its platform for globalisation. COFCO HK accounted for 62% of COFCO's total revenue and 65% of total assets in 2014. COFCO has absolute management control over COFCO HK, including a centralised treasury management. The acquisition of the 49% stake in Noble Agri will further establish COFCO HK as a global player with a fully integrated value chain from cultivation to distribution globally. In addition, it could also enable COFCO to secure more grain from overseas directly.

Leverage Remains High: COFCO HK's leverage ratios were high as of end-2014 following two major overseas acquisitions and weak FFO generation. The company has indicated its main focus in the next on to two years will be on consolidating all the acquired assets to improve profitability, which should reduce leverage. Fitch expects FFO-adjusted net leverage to remain above 10x in the next two to three years.

KEY ASSUMPTIONS

Fitch's key assumptions within our rating case for the issuer include:
- Low single-digit EBITDA margins in 2015-2018
- Capex of 3.5% of revenues
- No major international M&A aside from previously announced acquisition of 49% in Noble Agri for USD750m

RATING SENSITIVITIES

Negative: Future developments that may, individually or collectively, lead to negative rating actions include:
- Negative rating action on the Chinese sovereign
- Weakening of the linkages between COFCO HK and COFCO
- Weakening of the linkages between COFCO and the Chinese sovereign

Positive: Future developments that may, individually or collectively, lead to positive rating action include:
- Positive rating action on the Chinese sovereign
- Strengthening of the linkages between COFCO and the Chinese sovereign
- Moves by COFCO to inject other core assets, including COFCO Agri-Trading & Logistics and China Grains & Logistics Corporation, into COFCO HK, may result in the removal of the one-notch difference between the ratings for COFCO HK and the assessment for COFCO.