Moody's: West China Cement's medium-term notes issuance is credit positive

Moody's Investors Service says West China Cement's (WCC) issuance of medium-term notes (MTN) totalling CNY800m (US$129m) for three-years at 6.1 per cent is credit positive.

The notes were issued on 28 March 2013 through WCC's indirectly wholly owned onshore subsidiary Yaobai Special Cement Group Co Ltd, which owns the vast majority of the group's assets in Mainland China.

The proceeds from the MTN issuance will be used to refinance onshore bank loans, expand production facilities and for general working capital purposes.

"The issuance of the domestic MTNs is credit positive because it will improve WCC's liquidity profile and reduce its interest costs," says Jiming Zou, a Moody's Analyst.

WCC's interest expenses will be lowered by using the proceeds from the 6.1% MTNs to redeem short-term bank loans with higher funding cost of around 7%.

"The MTN issuance has also reduced WCC's refinancing risk, and its overall debt maturity will lengthen after it repays short-term bank loans," adds Zou.

"In addition, WCC's first time issuance of domestic MTNs is a milestone in broadening its funding channels," says Zou.

"The company has successfully overcome the high hurdles of issuing RMB MTNs in China, despite its status as a non-state-owned entity. It has managed to do so because of its growing business scale, increasing market share and acceptable debt leverage," adds Zou.

The regulatory authorities have authorized WCC to issue a total of CNY1.6bn in MTNs, with approval for a second tranche of RMB800 million to be issued not later than March 2015.

Moody's expects WCC's debt/EBITDA to increase to about 4.0x including MTNs by end-2013 from an estimated 3.7x at end-2012, because only part of the proceeds will be used to refinance debt. Nonetheless, such a result would fall within the parameters of the company's B1 corporate family rating and B1 senior unsecured rating, given the improvement in its funding and liquidity profiles.

In addition to the debt refinancing element, some of the proceeds will fulfill part of its committed capital expenditure of about CNY450m in 2013, which includes general plant upgrade spending and completion of retention payments on capacity commissioned in 2012. Such a level of investment illustrates a slowing down in the company's pace of expansion.