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Rating Action: Moody's downgrades Tianqi Lithium to Caa2 following default
Global Credit Research - 03 Dec 2020
Hong Kong, December 03, 2020 -- Moody's Investors Service has downgraded to Caa2 from Caa1 Tianqi Lithium Corporation's corporate family rating (CFR), and to Caa3 from Caa2 the senior unsecured rating on the bonds issued by Tianqi Finco Co., Ltd and guaranteed by Tianqi Lithium.
The ratings outlook remains negative.
In an announcement dated 1 December, Tianqi Lithium stated that it had on 30 November signed a loan extension agreement with its banks for a USD1.9 billion term loan facility due 29 November, extending the maturity to the earlier of 28 December 2020 or the effective date of an amended loan agreement.
This event constitutes a missed payment default under Moody's definition as Tianqi Lithium failed to meet its original payment promise and was granted a maturity extension.
"The downgrade reflects our concern that the absence of a satisfactory resolution on the term loan restructuring could lower recovery prospects for creditors," says Gerwin Ho, a Moody's Vice President and Senior Credit Officer. "The current situation could also lead to an acceleration of payments relating to the company's other obligations and impact its operations."
Tianqi Lithium's rating primarily reflects its highly strained capital structure as a result of its sizeable debt burden, elevated leverage, weak liquidity and weak financial management.
However, the rating considers the company's solid position in the lithium chemical industry and good profitability, which are driven by its supply of low-cost lithium minerals; although these strengths have been offset by its weak capital structure.
The company's rating is also constrained by its product concentration in lithium minerals and lithium chemicals, with limited revenue scale, and exposure to regulatory risks.
Tianqi Lithium's leverage has increased significantly following its acquisition of a 23.8% stake in Sociedad Quimica y Minera de Chile S.A. (SQM, Baa1 negative) in December 2018, which brought its total stake in the company to 25.9%.
Moody's expects Tianqi Lithium's financial leverage -- as measured by total debt to EBITDA and with SQM accounted for on an equity method basis -- will remain elevated above 10x over the next 12 months, given Moody's expectation of flat EBITDA and continued high debt. Such high leverage renders the company's capital structure untenable.
The company's flat EBITDA is attributable to muted lithium chemical prices that continue to reflect Moody's expectation of supply growth that could hinder cash flow generation and delay deleveraging.
Tianqi Lithium's liquidity remains weak. At 30 September 2020, the company's cash reserves -- including restricted cash -- of RMB1.3 billion were insufficient to cover its short-term debt of RMB16 billion, including the USD1.9 billion loan maturity that was due on 29 November.
Environmental, social and governance (ESG) issues are material to the ratings and were assessed as follows.
The company benefits from global trends to reduce carbon emissions, because lithium is a core input into the manufacture of electric vehicles. At the same time, its mining and chemical production operations are exposed to environmental and safety risks. Nonetheless, Moody's is not aware of any major environmental or safety incidents.
Moody's regards the coronavirus outbreak as a social risk under its ESG framework, given the substantial implications for public health and safety. Today's action also reflects the impact on Tianqi Lithium of the breadth and severity of the shock, and the broad deterioration in credit quality the event has contributed to.
From a governance perspective, Tianqi Lithium's ownership is concentrated and only a minority of its board consists of independent directors. Moreover, the company's debt-funded acquisition of a 23.8% stake in SQM and inability to arrange refinancing to meet its obligations reflect weak financial management and an aggressive financial policy.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
The negative outlook reflects Moody's concerns over the company's tight liquidity and ability to arrange timely funding to meet its obligations.
An upgrade is unlikely in the near term, given the negative outlook. A positive rating action could be considered if the company makes significant progress on servicing its debt obligations and improves its liquidity and capital structure, such as a satisfactory restructuring of its term loan facility.
Moody's could downgrade the ratings if principal losses for Tianqi Lithium's debt holders are likely to increase.
The principal methodology used in these ratings was Chemical Industry published in March 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1152388. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.
Headquartered in Chengdu, Sichuan Province, Tianqi Lithium Corporation is a leading lithium chemicals producer that mines, makes and sells lithium minerals and lithium chemicals.
The company owns a 51% stake in the Greenbushes lithium mine in Western Australia. It also owns a 25.9% stake in Chilean chemical producer, Sociedad Quimica y Minera de Chile S.A.
For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.
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Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.
Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.
The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.
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The first name below is the lead rating analyst for this Credit Rating and the last name below is the person primarily responsible for approving this Credit Rating.
Gerwin Ho VP - Senior Credit Officer Corporate Finance Group Moody's Investors Service Hong Kong Ltd. 24/F One Pacific Place 88 Queensway Hong Kong China (Hong Kong S.A.R.) JOURNALISTS: 852 3758 1350 Client Service: 852 3551 3077 Clement Cheuk Yiu Wong Associate Managing Director Corporate Finance Group JOURNALISTS: 852 3758 1350 Client Service: 852 3551 3077 Releasing Office: Moody's Investors Service Hong Kong Ltd. 24/F One Pacific Place 88 Queensway Hong Kong China (Hong Kong S.A.R.) JOURNALISTS: 852 3758 1350 Client Service: 852 3551 3077
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