TEXT-Fitch Upgrades Sinopec to LTFC IDR 'A'


(The following statement was released by the ratings agency)

Aug 26 - Fitch Ratings has upgraded state-owned China Petroleum & Chemical Corporation Limited's (Sinopec) Long-Term Foreign Currency Issuer Default Rating (IDR) and foreign currency senior unsecured rating to 'A' from 'A-'. Its Long-Term Local Currency IDR and local currency senior unsecured rating have also been upgraded to 'A+' from 'A'. The Outlook on the Long-Term Foreign Currency IDR is Stable, while the Outlook on the Long-term Local Currency IDR is Negative.

At the same time, the agency has upgraded Sinopec's Short-Term Foreign Currency IDR to 'F1' from 'F2' and affirmed its Short-Term Local Currency IDR at 'F1'.

The above rating actions follow a review of Sinopec's linkages with the Chinese sovereign, which is rated Long-Term Foreign Currency IDR 'A+'/Stable and Local Currency IDR 'AA-'/Negative. Fitch continues to rate Sinopec on a top-down basis, but considers there to be increased evidence of operational linkages that merit a closer alignment with its parent. Sinopec is now rated one notch below the China sovereign rating, reflecting the balance of linkages assessed under Fitch's parent and subsidiary rating linkage methodology.

Although legal linkages between Sinopec and China are weak, the company's strategic importance to the government is significant. Sinopec is China's largest producer, distributor and retailer of refined oil and petrochemical products. In 2010, Sinopec processed 56% of China's refining throughput. The rating linkages take into consideration the strong government influence on Sinopec's pricing of refined oil products, as well as the important role it plays in providing these refined products to the chemicals, plastics and transportation sectors. Sinopec is 75.84%-owned by China Petrochemical Corporation (Sinopec Group), a central enterprise administered by the state-owned Assets Supervision and Administration Commission of the State Council (SASAC).

Sinopec's standalone credit profile is, however, constrained by its high dependence on third-party crude oil supplies, limited pricing power in the refining segment, and potential deterioration in its financial profile due to significant capex and debt-funded acquisitions of overseas assets. In 2010, Sinopec's refining margin was CNY290.5/tonne (down 12.7% from 2009), mainly due to National Development and Reform Commission restrictions preventing Sinopec from passing on increases in the world oil price onto the domestic market. This trend continued in H111 and will be reflected in its full-year results. The burden from subsidising the country's refinery output is negative for Sinopec's standalone credit profile; however, the use of the company as a policy tool helps strengthen its linkages with the sovereign.

At end-2010, Sinopec's funds from operations-adjusted net leverage was 1.0x. Sinopec generated positive free cash flow of CNY35.5bn in 2010. Fitch expects Sinopec to maintain a prudent financial strategy and modest leverage from 2011 to 2013. Sinopec's financial strength is underpinned by its solid liquidity, drawing on its strong support from domestic banks and capital markets. At end-2010, Sinopec had total liquidity of about CNY178bn, consisting of CNY18bn in cash and liquid deposits and CNY160bn in undrawn credit facilities.

Positive rating action may arise from an upgrade of China's sovereign ratings. Negative rating action may arise from a downgrade of China's sovereign ratings or evidence of substantially weaker legal, operational or strategic ties between Sinopec and the state.


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