S&P Global Ratings on Sept. 23 placed its BBB+ long-term corporate credit and issue ratings, as well as its cnA+ long-term Greater China regional scale ratings, for Chinese steelmakers Baosteel Group Corp., Baoshan Iron & Steel Co. Ltd., and Bao-Trans Enterprises Ltd. on "CreditWatch" with negative implications.
Baosteel Group's main listed subsidiary, Baoshan Iron & Steel Co. Ltd., recently confirmed plans to take over Wuhan Iron & Steel Group via an equity swap and issue A shares to Wuhan shareholders, while Baosteel Group will remain a controlling shareholder in the unit. The merged company will be named China Baowu Steel Group.
The rating agency noted that Wuhan Iron & Steel's high debt burden is likely to hurt the combined group's financials.
"[Wuhan's] relatively weak product portfolio and operating efficiency are also likely to weaken Baosteel Group's strong competitive position and profitability," the agency commented.
S&P Global Ratings believes the overall competitive position of the combined group may weaken, as synergies will take time to materialize despite advantages related to scale, established clientele and diversity in products and geography.
The support of the Chinese government could somewhat offset the negative impact on the resulting entity's financials, subject to further clarifications on integration and the execution plan of the government for the transaction.
Moody's also recently warned that the announced merger is credit negative and will pressure Baosteel's ratings, as Wuhan's weaker operation and financial position are foreseen to weaken Baosteel's financial capacity.
S&P Global Ratings and S&P Global Market Intelligence are owned by S&P Global Inc.