Moody’s could drop Honghua

Moody's Investors Service said it placed Honghua Group Ltd.’s B3 corporate family rating and B3 senior unsecured rating on review for downgrade following the company's profit warning for the first half of 2015.

"The review for downgrade reflects Moody's concern that Honghua's financial and liquidity risk could be heightened by a further weakening of the company's profitability," Moody's vice president and senior analyst Chenyi Lu said in a news release.

On July 7, Honghua issued a profit warning for its 2015 first half results. It expects its profit attributable to the shareholders will decrease significantly and it may record a loss for the period due to sustained low oil prices.

Based on the announcement, Moody's preliminary estimates show Honghua's adjusted debt/EBITDA will surge above 9 times over the next six to 12 months and adjusted EBITDA/interest will plummet below 2 times. These financial ratios are weak for its B3 rating category.

Apart from higher debt leverage, the agency said it is concerned that the company could experience slower sales, which would impair its liquidity position.

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