OREANDA-NEWS. Fitch Ratings has assigned a final rating of 'A+' to China Shenhua Energy Company Limited's (Shenhua) senior unsecured notes.

The US dollar-denominated notes were issued in three tranches: USD500m 2.5% notes due 2018, USD500m 3.125% notes due 2020, and USD500m 3.875% notes due 2025. The notes were issued by China Shenhua Overseas Capital Company Limited, a wholly owned subsidiary of Shenhua Hong Kong Ltd., which is in turn a wholly owned subsidiary of Shenhua. The notes are guaranteed by Shenhua Hong Kong Ltd., and supported by a keepwell, liquidity support and equity interest purchase covenants deed (keepwell deed) entered into by Shenhua.

The notes are rated at the same level as Shenhua's senior unsecured rating of 'A+' based on Fitch's view that the keepwell deed signals Shenhua's strong intention to ensure the obligations under the bonds will be honoured.

The final rating assignment follows a review of final documentation materially conforming to the draft documentation previously reviewed. The final ratings are the same as the expected ratings assigned on 6 January 2015.

Shenhua's standalone credit profile of 'A' reflects its robust operating profile underpinned by a unique integrated business model with high quality assets, favourable regulations and a conservative financial profile, which mitigate its country and industry concentration risks. At a group level, the consolidated financial profile of its 100% state-owned parent, Shenhua Group Co Ltd (Shenhua Group), is weaker due to additional debt, but before taking into account shareholder (state) support. Considering the strategic linkages between Shenhua and Shenhua Group, and between Shenhua Group and China (A+/Stable), Shenhua's IDR of 'A+' effectively incorporates a one-notch uplift over its standalone credit profile.

KEY RATING DRIVERS
Unique Integrated Business Model: Shenhua is a highly integrated coal enterprise, with operations spanning coal mining, coal transportation, power generation and coal chemical production. Its presence in the various segments of the coal value chain supports its strategic position in China's energy space. Shenhua is the largest producer and supplier of coal to power plants in China, and is itself a major electricity supplier.

High Quality Assets: Shenhua's coal reserves are characterised by their low sulphur and ash content, and high calorific value; and the costs of its coal mining operation are low compared with global peers. It owns and operates highly profitable railways to transport coal from the west to the east of China. The company's installed power-generation capacity has also achieved higher utilisation and environmental compliance standards than the national average.

Concentration Risks: The company's focus on coal exposes it to a single commodity price. Still, Shenhua's integrated operations ensure that earnings cyclicality at its coal mining is balanced by revenue from other segments. In 2013, 50% of its operating profits came from coal mining operations, 26% came from power generation and 19% from railways.

Being focused on China is not a significant risk for Shenhua, as the country relies on coal-fired power and government policies favour large-scale domestic coal mining players like Shenhua.

Highly Regulated Industries: Coal mining and power generation are highly regulated sectors in China. Nonetheless, the overall regulatory environment has been generally supportive of large-scale, leading players such as Shenhua. While power tariffs are regulated, the state has allowed reasonable returns for operators since 2010.

High Capex, Conservative Leverage: Shenhua's yearly capex is likely to stay above CNY50bn in the next three years to support asset expansion; that is on top of spending that would occur if it were to buy assets from its parent. Leverage - gross debt net of cash to FFO - will remain conservative at below 1.5x. Fitch expects the company's operating cash flow, forecast to average more than CNY65bn a year in 2015-2017, to support a substantial part of its investments and help to contain incremental debt funding.

State Ties Lift Ratings: Shenhua's IDR of 'A+' incorporates effectively one-notch uplift over its standalone credit profile, reflecting the company's strategic and operational links with its 73%-parent Shenhua Group, and between Shenhua Group and the sovereign. Shenhua Group, wholly owned by the State-Owned Assets Supervision and Administration Commission of the State Council of China (SASAC), has higher debt leverage on a consolidated basis.

RATING SENSITIVITIES
Positive: Fitch does not expect any positive rating action on Shenhua's standalone rating in the near term because the company is undergoing further expansion. Future developments that may, individually or collectively, lead to positive rating action on Shenhua's standalone rating include:
- FFO net leverage maintained at below 1x for a sustained period, and
- FCF generation reverts to a significant positive position.

Negative: Future developments that may, individually or collectively, lead to negative rating action include:
- FFO net leverage above 1.5x on a sustained basis;
- Evidence of weakening links with the state, or if there is a downgrade of China's sovereign ratings.