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Rating Action:

Moody's downgrades Tianqi Lithium's ratings to B1; outlook negative

23 Dec 2019

Hong Kong, December 23, 2019 -- Moody's Investors Service ("Moody's") has downgraded to B1 from Ba3 Tianqi Lithium Corporation's ("Tianqi Lithium") corporate family rating and the senior unsecured rating on the bonds issued by Tianqi Finco Co., Ltd and guaranteed by Tianqi Lithium.

The ratings outlook remains negative.

RATINGS RATIONALE

"The ratings downgrade mainly reflects the materially smaller-than-expected proceeds from Tianqi Lithium's rights issue," says Gerwin Ho, a Moody's Vice President and Senior Credit Officer. "Such a situation will result in the company's slower-than-expected deleveraging and tighter-than-expected liquidity; two factors that position the company in the B rating category."

"The negative ratings outlook continues to reflect the uncertainty related to Tianqi Lithium's refinancing plans, weak liquidity position and weak operations," adds Ho, who is also Moody's Lead Analyst for Tianqi Lithium.

Tianqi Lithium's leverage increased following its acquisition of a 23.8% stake in Sociedad Quimica y Minera de Chile S.A. (SQM, Baa1 stable) in December 2018, which brought its total stake in the company to 25.9%.

Tianqi Lithium announced a rights issue in which it will issue new shares totaling 343 million at RMB8.75 per share. If fully subscribed, the proceeds will total about RMB3.0 billion, which is lower than the upper range of RMB7.0 billion that Moody's had earlier expected.

As a result, Tianqi Lithium's financial leverage — as measured by total debt to EBITDA — should remain elevated at about 7.5x over the next 12 months, with SQM accounted for on an equity method basis.

While the company's leverage will stay elevated, Tianqi Lithium has plans to improve its capital structure, including the repayment of the portion of its acquisition loan due in November 2020, through other financing plans. Moody's will monitor the progress of such plans.

Tianqi Lithium's revenue fell by 20% year-on-year in the first nine months of 2019, amid declining lithium chemical prices. Nevertheless, Moody's expects that the company will grow its revenue over the next 12-18 months, because increased sales volumes will offset lower prices.

At the same time, any greater volatility in lithium chemical prices than Moody's currently expects could weaken the company's cash flow generation and delay deleveraging.

Tianqi Lithium's liquidity is weak. At 30 September 2019, the company's cash reserves — including restricted cash — of RMB1.7 billion were insufficient to cover its short-term debt of RMB3.1 billion.

Nevertheless, Moody's expects that the company will be able to roll over its debt with banks, given its strong market position.

The company also has a track record of access to diversified funding channels, including onshore debt instruments such as medium-term notes, and equity fund raising from its listing in Shenzhen.

Tianqi Lithium's B1 corporate family rating reflects the positive demand outlook for lithium chemical products, the company's strong position in the lithium chemical industry, and robust profitability, driven by its supply of low cost lithium minerals.

On the other hand, the rating is constrained by Tianqi Lithium's product concentration in lithium minerals and lithium chemicals, with limited revenue scale, and exposure to regulatory risks.

Environmental, social and governance issues are material to the rating outcome and were assessed as follows.

First, the company benefits from global trends to reduce carbon emissions, because lithium is a core input into the manufacture of electric vehicles.

Second, its mining and chemical production operations are exposed to environmental and safety risks.

Third, 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 hints at an aggressive financial policy.

The senior unsecured rating is exposed to legal and structural subordination, because a substantial portion of the liabilities are at the operating company level and there is secured lending related to the acquisition financing. Downward pressure on the rating could emerge, if the company does not succeed in refinancing all or part of the acquisition loan through non-debt financing.

The outlook on Tianqi Lithium's ratings could return to stable, if the company executes its refinancing plan, and improves its liquidity position and capital structure significantly.

Conversely, downward ratings pressure could emerge, if, over the next 6-12 months, the company fails to execute its refinancing plan or improve its liquidity position and capital structure significantly.

The principal methodology used in these ratings was Chemical Industry published in March 2019. 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.

REGULATORY DISCLOSURES

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.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

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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.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

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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