At the same time Moody’s has changed the outlook on the rating to stable from positive. “The upgrade reflects the improvement in Wanhua Chemical’s market position, competitiveness and diversification followings its acquisition in August 2018 of its major shareholder — which held 47.92% of Wanhua Chemical and 100% of BorsodChem Zrt. (BorsodChem) — for RMB52 billion through the issuance of new shares,” says Danny Chan, a Moody’s Analyst.

Based on the combined annual capacity of 2.1 million tonnes, Wanhua Chemical is the largest producer of methylene diphenyl diisocyanata (MDI) globally, with an approximate 25% market share. Its revenue, EBITDA and assets for 2017 — pro-forma for the acquisition — would increase by 22%, 26% and 19% compared with the standalone figures, to RMB64.8 billion, RMB25.8 billion and RMB78.4 billion. This scale make it comparable with most peers in the Baa category.

“Wanhua Chemical’s improved business fundamentals, diversification and strong financial profile will help it better weather cyclicality of its chemical products,” adds Chan.

Specifically, BorsodChem’s production capacity for toluene diisocyanate (TDI)/polyvinyl chloride of 250k/400 kilo-tonnes per annum (ktpa) will help reduce Wanhua Chemical’s exposure to MDI prices. Although the company is a major MDI producer in central Europe, BorsodChem generates the majority of its income thought the manufacture of TDI, which accounted for 36.9% of its total gross profit in the first six months of 2018.

Over the past 18 months, BordsodChem has benefited from tight supply conditions in global TDI markets owing to capacity outages and project delays. As a results, its revenue and gross profit rose by 52% and 112% year-on-year to RMB13.1 billion and RMB6.0 billion in 2017.

“The upgrade also reflects our expectation that Wanhua Chemical will maintain its strong operating performance and continue to deleverage amid tight supply-demand conditions over the next 2-3 years,” says Chan.

Wanhua Chemical’s leverage and interest coverage remained largely unchanged following the restructuring, as the acquisition was effected through share issuance and thus did not result in any cash outlay.

Moody’s expects Wanhua Chemical’s leverage will decline to 0.8x-0.9x over the next 12-18 months from 1.3x in 2017 (or to 0.9x from 1.2x on a standalone basis), supported by sustained positive free cash flow and double-digit percentage growth in EBITDA. This level of leverage is appropriate for its rating level.

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