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Press Release: Fitch Rates China Southern Grid's USD Notes Final 'A+'

3 May 2017 4:35 am
 
 
The following is a press release from Fitch Ratings: 
 

Fitch Ratings-Hong Kong/Shanghai-03 May 2017: Fitch Ratings has assigned China Southern Power Grid Co., Ltd's (CSG, A+/Stable) USD600 million 2.75% senior unsecured notes due 2022 and USD900 million 3.5% senior unsecured notes due 2027 final ratings of 'A+'.

The notes are issued by CSG's indirectly 100%-owned subsidiary, China Southern Power Grid International Finance (BVI) Co., Limited, and guaranteed by CSG. The proceeds will be used for refinancing existing debt and general corporate purposes.

The notes are rated at the same level as CSG's senior unsecured debt rating as they represent direct, unconditional, unsecured and unsubordinated obligations of the company. The assignment of the final rating follows the receipt of documents conforming to information already received and the final rating is in line with the expected rating assigned on 17 April 2017.

KEY RATING DRIVERS

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

Strategic Role in China: CSG is one of two nationwide power transmission and distribution companies in China. The company is the monopoly power-grid operator in five southern provinces covering 230 million residents. CSG is also a major electricity supplier to Hong Kong and Macao. It has been consistently receiving financial support from the central government, including substantial capital injections, operating subsidies and tax benefits. CSG is also allowed to retain all its earnings for future development.

Strong State Control: The central government retains very strong control over CSG's operations and strategies even though it does not have a majority shareholding in CSG. The company's four shareholders are: the central government (26.4%), Guangdong province (38.4%), Hainan province (3.2%) and China Life Insurance (Group) Company (32%). The central government has increased its stake in CSG in the past, and is likely to continue to strengthen its control.

Power-Sector Reform Neutral: Fitch considers the evolving power-sector reform to be neutral to CSG. The company will remain of strategic importance to the central government, which aims to maintain control of the power transmission grid while opening up power retailing.

China's National Development and Reform Commission announced a new provincial level power transmission and distribution (T&D) tariff mechanism in 2016. Under the new mechanism, the T&D tariff will be set based on the regulated T&D asset base, regulated return and regulated cost. We expect only a limited earnings impact from this new mechanism in the near term as it will be applied in a gradual way - and, importantly, we estimate that, on a national level, the new T&D tariff will be similar to the spread under the previous price mechanism. In the longer term, we think the new T&D tariff provides greater stability and transparency to the grid companies, as they will no longer be subject to volume and price risks.

Solid Standalone Profile: CSG's standalone financial profile is robust for its 'A' standalone rating. Fitch expects CSG's cash flow generation to remain robust, funds flow from operations (FFO)-adjusted net leverage to remain below 3x (end-2015: 2.8x), and FFO fixed-charge coverage above 6x (end-2015: 6.8x) in the next three to four years.

DERIVATION SUMMARY

The ratings of CSG are equalised with the China sovereign (A+/Stable), the company's ultimate owner, due to strong operational and strategic linkage with the sovereign. CSG is the monopoly power-grid operator in five southern provinces covering 230 million residents, and also a major electricity supplier to Hong Kong and Macau. As one of two nationwide power transmission and distribution companies, CSG's linkage with the China sovereign is most comparable with State Grid Corporation of China (A+/Stable).

KEY ASSUMPTIONS

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

- - CSG's power sales to industrial & commercial users to grow by 2.5% per year and to residential users by 5%-10% per year

- - Effective transmission tariff (gap between retail tariff and on-grid tariff) to decrease gradually by 0.6% per year in the next three to four years, due to the impact from transmission tariff reform

- - Total capex of CNY75 billion-90 billion in the next three to four years, including potential acquisitions.

RATING SENSITIVITIES

Future developments that may, individually or collectively, lead to negative rating action include:

- - Negative rating action on the China sovereign;

- - A significant weakening of linkages with the sovereign in conjunction with a material deterioration in the standalone credit profile of the company;

- - CSG's 'A' standalone profile may be lowered if its FFO- adjusted net leverage deteriorates to over 3.0x and/or its FFO interest cover falls to less than 5.0x, on a sustained basis.

Future developments that may, individually or collectively, lead to positive rating action include:

- - Positive rating action on the China sovereign, provided CSG's linkages with the sovereign remain intact.

For China's sovereign rating, Fitch outlined the following sensitivities in its rating action commentary on 21 November 2016:

- The main factors that individually or collectively could lead to rating action are:

Positive

- - Greater confidence that the debt problem in the broader economy can be resolved without a material negative impact on growth or financial stability.

- - More evidence that the economy can rebalance smoothly without experiencing a disruptive "hard landing".

- - Widespread adoption of the Chinese yuan as a global reserve currency.

Negative

- - A continuation of policy settings that result in a further build-up of the economy's imbalances and vulnerabilities.

- - An adverse macroeconomic or financial shock that weakens medium-term growth prospects or affects public finances.

- - Sustained capital outflows sufficient to erode China's external balance sheet strengths, or undermine financial stability.

LIQUIDITY

CSG maintains healthy liquidity and a well-diversified debt maturity profile. The liquidity position stems from its robust internal cash generation, its well-structured debt maturities, as well as its access to debt markets. CSG also centrally manages the cash flow generated by its subsidiaries.

Contact:

Primary Analyst

- Edwin Lam

- Director

- +852 2263 9975

- Fitch (Hong Kong) Limited

- 19/F Man Yee Building

- 68 Des Voeux Road Central, Hong Kong

Secondary Analyst

- Wei Yu

- Associate Director

- +86 21 5097 3389

Committee Chairperson

- Jeong Min Pak

- Senior Director

- +822 3278 8360

Date of Relevant Rating Committee: 12 December 2016

Media Relations: Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: wailun.wan@fitchratings.com.

Additional information is available on www.fitchratings.com

Applicable Criteria

- Criteria for Rating Non-Financial Corporates - Effective from 27 September 2016 to 10 March 2017 (pub. 27 Sep 2016)

- https://www.fitchratings.com/site/re/885629

- Parent and Subsidiary Rating Linkage (pub. 31 Aug 2016)

- https://www.fitchratings.com/site/re/886557

Additional Disclosures

- Dodd-Frank Rating Information Disclosure Form

- https://www.fitchratings.com/site/dodd-frank-disclosure/1023088

- Solicitation Status

- https://www.fitchratings.com/site/pr/1023088#solicitation

- Endorsement Policy

- https://www.fitchratings.com/regulatory

- ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTPS://WWW.FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE CODE OF CONDUCT SECTION OF THIS SITE. DIRECTORS AND SHAREHOLDERS RELEVANT INTERESTS ARE AVAILABLE AT HTTPS://WWW.FITCHRATINGS.COM/SITE/REGULATORY. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

- Copyright © 2017 by Fitch Ratings, Inc., Fitch Ratings Ltd. and its subsidiaries. 33 Whitehall Street, NY, NY 10004. Telephone: 1-800-753-4824, (212) 908-0500. Fax: (212) 480-4435. Reproduction or retransmission in whole or in part is prohibited except by permission. All rights reserved. In issuing and maintaining its ratings and in making other reports (including forecast information), Fitch relies on factual information it receives from issuers and underwriters and from other sources Fitch believes to be credible. Fitch conducts a reasonable investigation of the factual information relied upon by it in accordance with its ratings methodology, and obtains reasonable verification of that information from independent sources, to the extent such sources are available for a given security or in a given jurisdiction. The manner of Fitchs factual investigation and the scope of the third-party verification it obtains will vary depending on the nature of the rated security and its issuer, the requirements and practices in the jurisdiction in which the rated security is offered and sold and/or the issuer is located, the availability and nature of relevant public information, access to the management of the issuer and its advisers, the

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