ChemChina's Syngenta Deal Divides Moody's, Fitch on Debt Risks

Updated on
  • ChemChina debt-to-equity ratio was at 260% as of Sept. 30
  • Similar gauge for ChemChina's international peers was 61%

China National Chemical Corp.’s $43 billion deal to buy Syngenta AG is dividing credit raters on whether the company’s acquisition spree will load it with too much debt.

State-backed ChemChina is borrowing $50 billion for the purchase that would make it the world’s largest supplier of agrochemicals, according to people familiar with the matter. The Beijing-based company’s debt-to-equity ratio was 260 percent as of Sept. 30, more than four times the average of 61 percent for global agricultural chemical producers, data compiled by Bloomberg show.

“The Syngenta acquisition will lead to higher debt loads, which will have a negative impact on ChemChina’s financial health,” said Jiming Zou, a senior analyst at Moody’s in Shanghai. “The government support would mitigate, but likely not fully offset the standalone risk of higher leverage after the Syngenta acquisition.”

The deal announcement divided assessors with Moody’s placing ChemChina subsidiary China National Bluestar Group Co. under review for downgrade, while Fitch put it on positive watch. The split comes amid concern state-owned enterprises are accumulating too much debt, with Premier Li Keqiang reiterating the need for reform this month after the sector’s profits slid for 14 consecutive months. He also pledged to speed up promotion of Chinese companies as global players and the use of technology in agriculture.

“ChemChina’s leverage might increase, primarily depending on the final funding structure,” said Stella Wang, an analyst at Fitch in Shanghai. “But we believe the acquisition of Syngenta would raise ChemChina’s overall strategic importance to the Chinese agriculture and food industry, as Syngenta is the world’s third-largest seed company and one of the four dominant producers of genetically modified seeds. This would strengthen the linkages between ChemChina and the Chinese government.”

Given ChemChina’s "high-leverage position" and the strategic importance of agriculture, the government will probably support the acquisition, said Wang. Enhancing crop yields is crucial as the country has more than 20 percent of the world’s population with less than 10 percent of its arable land, Fitch wrote in a February statement. Yields are now more than 40 percent lower than those of most Western countries, it noted.

Expanding Deals

ChemChina announced acquisitions of $47.3 billion this year, including pending takeovers, a jump from $8.9 billion last year and $1.4 billion in 2014. A press official who wouldn’t be identified declined to comment.

Chinese companies have announced $72.6 billion of offshore acquisitions valued at $1 billion or more this year, compared with $73.6 billion in all of 2015, as a slump in exports fuels yuan depreciation expectations. The yuan has weakened 3.6 percent against the dollar in the past year.

“ChemChina’s standalone weak financials show it doesn’t have the capacity for the Syngenta deal,” said Lawrence Lu, an analyst in Hong Kong at Standard & Poor’s. “It is likely to get government support for the Syngenta transaction because the agriculture sector is one of the most important in China.”

S&P said on Feb. 5 its rating on Bluestar’s bonds wasn’t immediately affected. The three major assessors don’t rate ChemChina publicly.

High Costs

ChemChina’s debt was about 9.5 times its earnings before interest, tax, depreciation and amortization in 2014, while the average of global peers was only 2.3 in latest filings, according to data compiled by Bloomberg. It had total debt of 156.5 billion yuan as of Sept. 30, exceeding cash and cash equivalents of 29.8 billion yuan, Bloomberg-compiled data show.

Even so, the company’s leverage ratio has improved from 13 times Ebitda at the end of 2013, which Moody’s said was due in part to closure of inefficient production lines. ChemChina bought or invested in assets in Italy, France, Norway, the U.K. and Singapore in the past few years, including tiremaker Pirelli & C. SpA.

Moody’s cut China’s rating outlook to negative from stable last week, saying state-sector leverage raises risks aggravating a slowdown in economic growth as funds are diverted to service debt. CITIC Ltd., among the 38 state-owned enterprises with outlooks lowered by Moody’s, said Tuesday it will probably announce a writedown of $1.5 billion to $1.7 billion to reflect the declining value of its Sino Iron project in Australia.

“ChemChina will likely be busy with digesting its overseas acquisitions this year and consolidate them with its domestic operations,” said Zou at Moody’s. “Financing costs for ChemChina will be high because of those debt-funded acquisitions in the past few years.”

— With assistance by Lianting Tu, and Judy Chen

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