OREANDA-NEWS. Fitch Ratings has assigned expected ratings of 'A-(EXP)' to CK Hutchison International (16) Limited's proposed US-dollar-denominated guaranteed notes and CK Hutchison Finance (16) (II) Limited's proposed euro-denominated guaranteed notes.

The proposed senior unsecured notes will be unconditionally and irrevocably guaranteed by CK Hutchison Holdings Limited (CKHH, A-/Stable) and rank pari passu with other senior unsecured borrowings of CKHH. We believe the notes are issued mainly for refinancing purposes; CKHH had HKD28bn of debt falling due in 2H16 and another HKD77bn due in 2017, a large share of which are capital market debt instruments. The final ratings on the notes are contingent upon the receipt of documents conforming to information already received.

KEY RATING DRIVERS

1H16 Results In-Line with Expectations: CKHH's financial and operating results for the six months ended June 2016 are broadly within Fitch's expectations. Reported results were negatively affected by foreign-exchange movements against CKHH's reporting currency of the Hong Kong dollar. The group's port operations registered lower throughput due to a combination of slightly weaker trade volumes and competition in certain markets. Its retail operations, particularly the Health & Beauty segment, continued to perform well. Same-store sales shrank in Asia, but earnings in the segment were supported by continued organic growth in stores in the region and growth in Europe, including the UK.

The reported EBITDA benefitted from the performance of CKHH's infrastructure investments, led by its subsidiary Cheung Kong Infrastructure Holdings Limited (A-/Stable), and 3 Group Europe in telecommunications, but this was partially offset by weakness in energy segment due to low oil prices. 3 Group Europe continued to generate positive free cash flows (after both capex and license fees spend). Dividend receipts from associates and joint ventures during 1H16 also broadly conform to our expectations.

Diversified Businesses Underpin Stability: CKHH's ratings reflect its strong business profile and geographical diversification, and stable cash flow generation from its high-quality ports, retail, infrastructure, energy and telecommunications businesses. No single business division accounts for more than 40% of CKHH's EBITDA. The infrastructure and ports businesses provide visible, recurring cash flows to the company.

Stable Financial Profile: We expect CKHH's financial profile to remain stable, with FFO-adjusted net leverage remaining below 4.0x in 2016-2018 barring significant debt-funded acquisitions or a major increase in dividend payments. CKHH's reported financial performance is exposed to the effects of currency volatility, as seen in 2015 and 1H16. The company mitigates such risks through broadly matching the denomination of debt with the currency of its underlying assets.

3 Italy-Wind Merger Cleared: The European Commission has cleared the proposed merger of 3 Italy and Vimpelcom's Italian operation, Wind Telecom S. p.A (Wind) on 1 September 2016. Fitch had incorporated this merger in its forecasts as a non-cash joint-venture format as proposed by the company, and based on the merger completing by end-2016.

We expect 3 Group Europe's UK business to focus on improving operational efficiency and competitive positioning within the UK market, including securing adequate and reasonably priced spectrum for its operations, after EU competition authorities blocked 3 Group Europe's proposed acquisition of O2 UK.

Capital-Intensive Business: CKHH's infrastructure, ports and telecommunications businesses are capital-intensive and push up leverage, which constrains the overall ratings. There is also an element of structural subordination of cash flows, especially in the utilities-infrastructure assets, given the level of debt at the asset-owning level and that the operating cash flows of these businesses can only be accessed via dividends.

Strong Liquidity; Access to Funding: CKHH's ratings are supported by its robust liquidity profile and ease of access to capital. Reported cash and cash equivalents were HKD154bn at end-June 2016, and debt maturities are well-laddered. CKHH has strong access to capital markets for its capital needs.

KEY ASSUMPTIONS

Fitch's key assumptions within the rating case for the issuer include:

- Moderate Fitch-adjusted revenue growth in 2016-2017

- Fitch-adjusted EBITDA margins of around 20% in 2016-2017

- Wind transaction in Italy completes in 2016

- No dividends from Husky Energy in 2016-2018, given the cash flow-management initiatives of this company amid the low oil and gas price environment.

- Dividend payout ratio of 30%-40% in 2016-2017

- No major acquisitions or disposals

RATING SENSITIVITIES

Negative: Developments that may, individually or collectively, lead to negative rating action include:

- FFO-adjusted net leverage exceeding 4.0x on a sustained basis;

- Substantially negative free cash flow after acquisitions and disposals;

- Significant change in business mix and capital structure management that are adverse to its credit risk profile;

- A weakening in the quality or decreased quantity of recurring cash flows.

No positive rating action is expected in the near term due to CKHH's business profile.