OREANDA-NEWS. Fitch Ratings-Hong Kong- 9 March 2016: Fitch Ratings is maintaining the Rating Watch Negative (RWN) on MIE Holdings Corporation's (MIE) Long-Term Issuer Default Rating of 'B-', its senior unsecured rating and the ratings on MIE's USD200m notes due 2018 and USD500m notes due 2019 of 'B-' with a Recovery Rating of 'RR4', following the company's announced transaction to sell a controlling stake in its Kazakhstan operations.

MIE announced an agreement on 7 March 2016 with a Malaysian-based entity to sell a 60% equity interest in MIE's subsidiary holding Emir-Oil which holds the company's operations in Kazakhstan. MIE expects to raise USD155m from the stake sale if the transaction goes ahead as planned. The transaction is subject to shareholder and regulatory bodies' approval. The longstop date is 5 September 2016.

Fitch downgraded MIE's ratings to 'B-' from 'B' and maintained all ratings on RWN on 15 January 2015 due to liquidity concerns, especially reflecting the uncertainties relating to the company's only remaining bank credit facilities. The status of the bank facility remains unchanged. The announced transaction could significantly reduce the company's short-term liquidity concerns, although its medium-term refinancing risks associated with the bond maturities in 2018 and 2019 will remain. Furthermore, unless MIE improves its asset base and operations, following the sale of an effective 60% stake in Emir-Oil, MIE will be left with a smaller asset base to support its debt obligations. The maintenance of the RWN reflects the potential for negative rating action if the transaction does not happen as intended, or if MIE's liquidity situation is significantly affected prior to transaction closure.

KEY RATING DRIVERS
Near-Term Liquidity Issues Persist: MIE's has not been able to renew its only remaining bank credit facility (with a limit of CNY540m; CNY 494m undrawn at 30 June 2015). The company has said that it continues to draw down on this facility, while its renewal is being renegotiated. Any cash receipts from the proposed sale of interest in Emir-Oil for USD155m is only expected to arrive around 3Q16, provided the transaction goes ahead. MIE's management believes the company can benefit from unencumbered assets such as its production-sharing contract assets in China that could be used to secure credit facilities.

Required Deploying of Cash Proceeds: According to MIE's 2019 bond indenture, MIE is required to deploy all of the proceeds from asset disposals for either repayment of senior indebtedness, asset-replacement acquisitions or non-maintenance capex. If not fully utilised within 360 days of receiving the money, MIE would be obliged to make an offer to purchase the bonds, using any unutilised receipts. It remains unclear as to how MIE will deploy the proceeds and what impact its decisions may have on MIE's operating and financial profile.

Weakened Cash Flow Generation: In the immediate term, MIE's cash flow generation is hindered by low oil prices and its limited scale and diversification as well as the need to incur substantial capex to maintain production. MIE's realised oil price in 2015 was USD45.47 per barrel, and is likely to be lower for 2016. Fitch expects a gradual recovery in oil prices as the market reaches a balance, while the oil price is expected to remain under pressure in 2016. MIE has cut its capex since 2014, so we expect production in 2016 to be similar to 2015 levels. The company achieved an average daily net production of 10,153 barrels of oil equivalent per day in 2015 compared with 15,326 barrels per day in 2014. Furthermore, MIE's total equity production level will also decline due to the partial disposal of Emir-Oil, as Emir-Oil accounted for around 30% of the total production in 2015.

High Debt-Servicing Obligations: MIE has an annual debt-servicing obligation of over CNY300m arising from the interest on its US dollar bonds (against a CNY275m adjusted EBITDA, excluding several non-cash impairment items, reported by the company in 1H15). As of end-1H15, MIE had cash balances of CNY739m against total borrowing of CNY4.8bn. The company also faces significant debt maturities in the medium term when its US dollar bonds mature in 2018 and 2019, totalling USD700m.

Ratings of US Dollar Notes: The Recovery Rating of 'RR4' on MIE's senior unsecured notes is based on weakened (but still average) recovery prospects for its senior unsecured creditors. The sale of 60% of Emir-Oil will also reduce the headroom under the Recovery Rating of RR4. A substantial increase in secured debt can lead to weakening of recovery prospects for the senior unsecured creditors, thus placing pressure on the 'RR4' Recovery Ratings.

KEY ASSUMPTIONS
Fitch's key assumptions within our rating case for the issuer include:
- Oil prices in line with Fitch's base case price deck as outlined in the Fitch's "Oil Price Assumption for Fitch Corporate Analysis Lowered Again to USD35 for 2016", dated 24 February 2016
- Working-capital conversion cycle to remain stable

RATING SENSITIVITIES
We expect to resolve the RWN based on the company's ability to secure and maintain adequate liquidity.

Negative: Developments that may, individually or collectively, lead to negative rating action would include:
- Failure to maintain adequate liquidity. The loss of access to bank credit facilities prior to completion of the Emir-Oil stake sale will be negative for MIE's ratings; in addition, negative rating action would also be taken if the Emir-Oil transaction is not completed as expected by the company, together with it failing to secure adequate credit facilities.

Positive: Developments that may, individually or collectively, lead to positive rating action would include:
- Fitch will resolve the RWN after the Emir-Oil stake sale is completed based on the company's plans for the use of proceeds and the impact on the company's credit profile. However, an upgrade of the IDR is not anticipated - given the expected challenging operating environment which we expect to persist for some time; the company's limited scale; and the refinancing risks associated with its US dollar bond maturities.