OREANDA-NEWS. Fitch Ratings has assigned State Grid Europe Development (2014) Public Limited Company's (SGED) EUR700m 1.50% guaranteed senior notes due 2022 and EUR300m 2.45% guaranteed senior notes due 2027 final ratings of 'A+'

SGED is a wholly owned subsidiary of State Grid International Development Limited (SGID; A/Stable). SGID is a wholly owned subsidiary of State Grid Corporation of China's (SGCC; A+/Stable).

In place of a guarantee, SGCC has granted a keepwell deed to ensure that SGED and its guarantor, SGID, have sufficient liquidity to meet payments under the euro-denominated notes through an obligation to make an equity investment or provide a shareholder's loan or a combination of the two to SGED or SGID. The notes are rated at the same level as SGCC's senior unsecured rating based on Fitch's view that the keepwell deed with the obligation to invest signals SGCC's strong intention to ensure that SGED and SGID are able to honour their debt obligations.

Unlike many other keepwell deeds, the one SGCC is providing to SGED lacks a cross-border standby facility. Fitch does not view this as a material weakness as the notes are guaranteed by SGID, which is incorporated in Hong Kong and has sizeable cash generation ability and strong liquidity.

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.

KEY RATING DRIVERS
Equalised With the Sovereign: The ratings of SGCC are equalised with the China sovereign (A+/Stable), the company's ultimate owner, as per Fitch's Parent-Subsidiary Linkage methodology. The equalisation of SGCC's ratings with the state takes into consideration its strategic importance to China as well as strong financial and operational support extended to SGCC by the government.

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.

Evolving Regulatory Environment: Fitch considers the regulatory framework to be highly beneficial to SGCC overall. Fitch expects the state to maintain tight control on electricity transmission and distribution tariffs, preserving SGCC's strong financial and strategic position. The regulatory framework could evolve over the next decade, leading to a liberalisation of the retail segment that could be preceded by a clearer transmission and distribution tariff framework.

Support from Government: SGCC has been receiving monetary and tax treatment support from the state. Most importantly, the state ensures SGCC a reasonable return on invested assets. During the next several years, the country will rely on SGCC to develop the power grid to keep pace with economic growth, facilitate changes to the coal-fired generation capacity and develop renewable energy sources. The current tariff framework and support from the government will continue to allow SGCC to maintain a robust financial profile.

Strong Standalone Profile: SGCC's financial profile is robust for its 'A+' rating. Fitch expects SGCC's cash flow generation to remain strong, funds flow from operations (FFO) adjusted net leverage to remain below 2.75x and FFO interest cover to be around 8.5x on a sustained basis (2.0x and 8.5x respectively in 2013). 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 credit facilities from major banks of over CNY1trn. There is little secured debt (less than 5% of total consolidated debt). SGCC also centrally manages the cash flow generated by its subsidiaries.

RATING SENSITIVITIES
Negative: Future developments that may, individually or collectively, result in negative rating action:
-A negative rating action on the sovereign
-Weakening linkages with the sovereign 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 4 April 2014:

The main factors that individually, or collectively, could trigger positive rating action on China include:
- The country's ability to navigate structural economic adjustment without economic, financial or social disruption is centrally important for the sovereign credit profile and ratings. Progress on reform and rebalancing without disruptive shocks would reduce China's structural vulnerabilities.
- Greater confidence over the scale of the debt problem in China's broader economy, and of the approach to resolving it.

The main factors that could individually, or collectively, could trigger negative rating action on China include:
- Continuation of "more of the same" credit-fuelled and investment-led growth, reflecting an absence of material progress on reform and rebalancing, would exacerbate China's structural vulnerabilities. The ultimate resolution would likely be riskier and potentially costlier for the sovereign.
- A further significant and sustained rise in public indebtedness, potentially reflecting a crystallisation of contingent liabilities, without a clear prospect of a subsequent sustained decline.