Fitch Rates State Grid Corp of China's USD and EUR Notes 'A+(EXP)'
OREANDA-NEWS. Fitch Ratings has assigned State Grid Overseas Investment (2016) Limited's proposed US dollar and euro senior unsecured notes expected ratings of 'A+(EXP)'. State Grid Overseas Investment (2016) Limited is 100% owned by State Grid Corporation of China (SGCC, A+/Stable). The notes are guaranteed by SGCC.
The final ratings on the notes are contingent upon the receipt of final documents conforming to information already received.
KEY RATING DRIVERS
Equalised With the Sovereign: The ratings of SGCC are equalised with the China sovereign's (A+/Stable), the company's ultimate owner, as per Fitch's Parent and Subsidiary Linkage methodology. The equalisation of SGCC's ratings with the state's takes into consideration its strategic importance to China as well as strong financial and operational support extended to SGCC by the government.
SGCC continues to maintain a strong financial profile despite its large investment requirement. Fitch continues to assess its standalone credit profile at 'A+'.
Strategic Role in China: SGCC's monopoly concessions serve over 1.1 billion users in 26 provinces, or 88% of the national territory, representing approximately 80% of the nation's total electricity consumption. As the largest purchaser, distributor and retailer of electricity, SGCC also holds a critical role in the electricity value chain in China.
Transmission Tariff Reform Broadly Neutral: The power transmission and distribution tariff reforms piloted in several regions in China are likely to add more predictability and stability to the grid operator's cash flow, although the exact financial impact on the grid operators remains unclear in the near term. Notwithstanding the on-going reforms, Fitch expects the state to maintain its tight control on companies in the electricity transmission and distribution sector, and ensure that the two grid operators, SGCC and China Southern Power Grid Co., Ltd (A+/Stable), are able to maintain a strong financial position given their importance in the country's electricity value chain as well as the still very large investments required in the country's electricity grid.
The power transmission and distribution tariff reforms by the National Development and Reform Commission (NDRC) aim set up a province-specific transmission tariff based on the power grid's asset scale, cost and market investment return rate. Ultimately, the added transparency to the transmission tariff will enable large corporates to purchase electricity directly from the power generation companies. The power transmission and distribution tariff is now being piloted in18 provincial power grids and one regional power grid.
Robust Standalone Profile: SGCC's financial profile is robust for its 'A+' rating. Fitch expects SGCC's cash flow generation to remain strong. Fitch expects SGCC's capex to exceed CNY400bn a year in the medium term, largely for the ultra-high voltage network and other grid improvements, including rural grid upgrades. Despite such high capex, Fitch expects SGCC's funds flow from operations (FFO) adjusted net leverage to remain below 3x and FFO interest cover to be over 7x on a sustained basis (2.1x and 8.7x respectively in 2015). The company also maintains healthy liquidity and a favourable debt profile.
Strong Liquidity: SGCC's liquidity position stems from its robust internal cash generation, its well-structured debt maturities, as well as its access to debt markets. SGCC has committed unutilised credit facilities from major banks of around CNY1trn. There is little secured debt (less than 5% of total consolidated debt). SGCC also centrally manages the cash flow generated by its subsidiaries.
Fitch's key assumptions within the rating case for SGCC include:
- Electricity usage growth in China of low-single-digit per year in 2016 to 2019
- Slight reduction of EBIT margin reflecting the conservative projection of transmission tariff after the reform
- Capex remains elevated at CNY400bn-500bn per year in 2016 to 2019
- Total debt continues to increase moderately as capex continues to exceed operating cash generation
Negative: Future developments that may, individually or collectively, result in negative rating action:
- A negative rating action on the sovereign
-Significant weakening of linkages with the sovereign (not expected in the short to medium term) in conjunction with deterioration in FFO-adjusted net leverage to over 3.0x and FFO interest cover to less than 5.0x on a sustained basis
Positive: Future developments that may, individually or collectively, result in positive rating action:
- A positive rating action on the sovereign provided the linkages remain intact
For the sovereign rating of China, the following sensitivities were outlined by Fitch in its Rating Action Commentary of 26 November 2015:
The main factors that individually, or collectively, could trigger positive rating action on China include:
- Increased evidence that the economy can adjust smoothly while rebalancing without experiencing a disruptive "hard landing"
- Greater confidence that the debt problem in the broader economy can be resolved without a material negative impact on growth or financial stability
- Widespread adoption of the renminbi as a reserve currency globally
The main factors that individually, or collectively, could trigger negative rating action on China include:
- A sharper growth slowdown than currently anticipated, leading to a materialisation of risks to financial and/or social stability
- A rise in estimated general government indebtedness well above Fitch's current estimate
- Sustained capital outflows sufficient to erode China's external balance-sheet strengths, or undermine financial stability
- A change in policy direction that signalled decreased willingness to tackle the economy's imbalances and vulnerabilities, thereby increasing the risk of an eventual disorderly adjustment