TEXT-S&P revises China Fishery outlook to negative; afrms 'B+' rtg

(The following statement was released by the rating agency)

Dec 04 -

Overview

-- We believe China Fishery's contract supply business in Russia is now

subject to higher regulatory risk.

-- In our opinion, any unfavorable outcome for the company's contract

supply business could negatively affect its financial flexibility and access

to capital markets.

-- We are therefore revising our rating outlook on China Fishery to

negative from stable. As a result, we are also lowering our Greater China

regional scale rating on China Fishery and the company's notes to 'cnBB-' from

'cnBB'.

-- We are also affirming our 'B+' long-term corporate credit rating on

the company and the 'B+' issue rating on the notes.

Rating Action

On Dec. 4, 2012, Standard & Poor's Ratings Services revised its rating outlook

on China Fishery Group Ltd. to negative from stable. At the same time, we

affirmed the 'B+' long-term corporate credit rating on China Fishery and the

'B+' issue rating on the company's senior unsecured notes. In line with the

outlook revision, we also lowered the long-term Greater China regional scale

ratings on China Fishery and the notes to 'cnBB-' from 'cnBB'.

Rationale

We revised the outlook on China Fishery because we believe a possibility that

the company's contract supply business in Russia could be materially affected

has increased. Recent media reports suggest that Russia's Federal Antimonopoly

Services has ordered China Fishery and its parent group, Pacific Andes, to

sell the Russian fishing assets they allegedly acquired in violation of the

law. We assess China Fishery's business risk profile as "weak" and its

financial risk profile as "aggressive," as our criteria define these terms.

We believe there might be some ongoing changes in how the Russian regulator

manages the nation's strategic resources, including aquatic biological

resources. As a result, we have lower visibility on the revenue and

profitability of China Fishery's contract supply business. The Pacific Andes

group has confirmed that it does not own any fishing quotas in Russian waters

or companies that have such quotas. However, the Russian government could

still take adverse actions on the group depending on its interpretation of

Russian law.

While China Fishery has increased diversity, the company will continue to rely

on its contract supply business in Russia in 2013, given the likely

underperformance of the Peruvian business, which we anticipate to be weak, due

to reduced total allowable catch. The contract supply business generated over

60% of China Fishery's revenue, EBITDA, and operating cash flow in the fiscal

year ended Sept. 30, 2012. The company increased total prepayment to suppliers

in the northern Pacific to about US$285 million from US$135 million following

a fourth long-term supply agreement (LSA) on Nov. 14, 2012. We believe this

agreement further increases the company's exposure to its contract supply

business.

China Fishery's financial performance in fiscal 2012 was better than we had

anticipated. This was largely because the company used the proceeds from a

US$300 million bond issuance to pay off part of its outstanding bank revolver

facilities. Its debt-to-EBITDA ratio of 2.7x (fiscal 2011: 2.1x) was below our

expectation of more than 3.0x, and its ratio of funds from operations (FFO) to

debt of 32.1% (fiscal 2011: 37.9%) was better than our forecast of 26.8%.

In our revised base-case scenario, we expect China Fishery's overall revenue

to remain weak in fiscal 2013, given the uncertainties in the company's

contract supply business and the weak outlook for the Peruvian operations. We

further assume that any potential improvement in gross margins due to the LSA

will be offset by lower average selling prices. As a result, we expect China

Fishery's debt-to-EBITDA ratio to remain stable in fiscal 2013 and its

FFO-to-debt ratio to weaken slightly to about 30%.

Any significant negative effects on China Fishery's contract supply business

in the northern Pacific will also negatively affect the Pacific Andes group,

in our opinion. The parent company, Pacific Andes International Holdings Ltd.

(PAIH; not rated), has an aggressive financial risk profile with a

total-debt-to-EBITDA ratio of 4.9x in the first half of fiscal 2012 (fiscal

2011: 5.5x). PAIH could become highly leveraged given that the fishery and

fish supply division accounted for 32.1% of its total revenue in the first

half of 2012. This could constrain the rating on China Fishery.

China Fishery's operating track record, low leverage, and high margins are

rating strengths, in our opinion.

Liquidity

China Fishery's liquidity is "less than adequate," as defined in our criteria.

Our assessment is primarily based on the company's aggressive financial policy

and low minimum cash balance. China Fishery used half the proceeds from the

US$300 million senior unsecured bond issuance in July 2012 to pay for the LSA,

and the remaining to repay bank loans. The company's surplus cash for working

capital needs remains low. However, free cash flow turned positive in fiscal

2012, the first time in four years.

Source: http://news.yahoo.com/text-p-revises-china-fishery-outlook-negative-afrms-070609565--sector.html

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