Fitch Ratings has affirmed
Fitch has also affirmed CSC's senior unsecured rating at 'AA(twn)'.
CSC's National Long-Term Rating reflects its high strategic and operational linkages with the Taiwanese government (AA/Stable) and low default risk relative to domestic issuers.
Key Rating Drivers
State Ownership, Incentive to Support: The Taiwanese government, via the
We expect full government support for CSC, if needed, because of the company's importance to
Dominant Low-Cost Producer: CSC's EBITDA margin is consistently higher than those of regional peers due to its low-cost position, downstream vertical integration with a focus on high value-added products. CSC is
Negative FCF, Increasing Leverage: CSC has a good record of free cash flow (FCF) generation, but we expect FCF to turn negative in 2022 on lower EBITDA generation due to low steel prices, and a large dividend payment associated with its strong performance in 2021. As a result, we expect its EBITDA net leverage to increase to 3.4x in 2022 (FY21:1.4x).
We also expect the EBITDA margin to improve in 2023 because raw material prices, such as iron ore and coking coal, are set to moderate based on Fitch's price assumptions. We therefore expect FCF generation to improve, but its net leverage level will remain above 3.0x over 2023-2024 due to its relatively high dividend payout ratio. Even so, the company has strong financial flexibility, with EBITDA interest coverage over 10x times in the past four years benefiting from low borrowing costs.
Derivation Summary
The two-notch difference between the National Ratings of CSC and state-owned peer
The one-notch difference between the ratings of
Key Assumptions
Fitch's Key Assumptions Within Our Rating Case for the Issuer:
No additions to steelmaking capacity in the near term;
Revenue to decrease by 12.8% in 2022 and 11.1% in 2023, with minimal movements thereafter;
EBITDA margin to decrease to 14.7% in 2022 (2021: 23.8%), followed by gradual increase to about 18.5% in 2025;
Capex of about
Disciplined dividend payment based on performance;
No major M&A for 2022 and beyond.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Strengthened probability of government support.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
Lower probability of government support.
For
Factors that could, individually or collectively, lead to negative rating action/downgrade:
Structural Features: Deterioration in cross-strait relations sufficient to undermine
Public Finances: An adverse macroeconomic or financial shock that weakens medium-term growth prospects and negatively affects public-debt dynamics.
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Structural Features: A sustainable resolution of cross-strait tensions that significantly reduces the possibility of economic and political shocks.
Liquidity and Debt Structure
Adequate Liquidity: Total readily available cash was
Issuer Profile
CSC is the largest integrated steel producer in
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