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Moody's flags ratings upgrade for Yanzhou over Yancoal's Australian deal

Moody's on Aug. 9 placed Yanzhou Coal Mining Co. Ltd.'s B2 corporate family rating and senior unsecured rating under review for potential upgrade as a result of Yanzhou Coal's 78%-owned subsidiary Yancoal Australia Ltd.'s plans to raise US$2.5 billion in equity to fund the acquisition of Coal & Allied Industries Ltd. from Rio Tinto.

The financing comprises a 23.6-for-1 entitlement offer priced at 10 cents per share to raise about US$2.35 billion and a placement to strategic investors at the same price to raise US$150 million.

Yanzhou Coal has committed to subscribe for US$1 billion of the entitlement offer, while Yancoal shareholders Senrigan Capital Management and Noble Group Ltd. have both outlined plans to block the fundraising.

"The review for upgrade of Yanzhou Coal's ratings reflects our expectation that Yancoal Australia's financial profile and operations will improve, upon the successful completion of the Coal & Allied acquisition," Gerwin Ho, a Moody's vice president and senior analyst, commented.

Coal & Allied holds an 80% stake in the Mount Thorley coal mine, a 55.57% interest in the Warkworth mine and a 67.6% in the Hunter Valley Operations, along with a 36.5% stake in a coal export terminal at Newcastle port.

Moody's expects the acquisition to result in Yancoal's operations transforming from a current loss position to a profitable situation, as the three mines are among the 10 largest low-cost mines in Australia and produce high-quality thermal coal products which are in high demand in Asia.

"Such an improvement in Yancoal Australia's profitability would in turn facilitate debt deleveraging at Yanzhou Coal, because Yancoal Australia will remain a 65%-owned subsidiary of Yanzhou Coal, upon completion of the equity raising as currently planned, and the conversion of Yanzhou Coal's subordinated capital notes in Yancoal Australia into equity," the Moody's team noted.

These changes could result in upward pressure on Yanzhou Coal's B2 corporate family rating. The current rating includes a two-notch uplift to reflect Moody's expectation of extraordinary financial support from its parent, Yankuang Group Co. Ltd., in cases of financial distress. Yankuang Group is wholly owned by the Shandong provincial government.