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TEXT-Fitch Affirms Hong Kong's CKI at 'A-'; Outlook Stable
(The following was released by the rating agency)
August 01 (Fitch) Fitch Rating has affirmed Hong Kong-based Cheung Kong Infrastructure Holdings Limited's (CKI) FC Long-Term Issuer Default Rating (IDR) at 'A-' with Stable Outlook. Simultaneously, CKI's senior unsecured rating and its USD300m fixed-rate callable perpetual securities issued in February 2012 have been affirmed at 'A-' and 'BBB', respectively.
CKI's ratings are underpinned by its stable and predictable cash inflows from its regulatory assets portfolio. Its portfolio is diversified across a number of countries and utility/infrastructure sectors. Key contributors include Power Assets Holdings Limited in Hong Kong; UK Power Networks Holdings Limited, Northumbrian Water Group ('BBB+'/Stable), Northern Gas Networks Limited in the UK; and CHEDHA Holdings Pty Ltd. in Australia. Fitch estimates that regulated assets account for over 85% of CKI's total cash inflows.
CKI's reliance on cash channelled upstream from associates and investments in the form of dividends and interest payments constrain its ratings. This is because such cash is subordinated to external creditors at operating companies and regulatory requirements of the respective regulated businesses. However, this risk is, to some extent, mitigated by the stable regulatory environment in the countries to which CKI is exposed, by the strong financial profiles of regulated businesses and management control over its investments and affiliates.
Fitch views positively CKI's strategy of acquiring assets in developed markets with stable regulatory regimes, which can provide immediate cash returns. Nevertheless, CKI credit profile can be affected by large debt-funded acquisitions. Due to acquisition activities in the last two years, its interest coverage, as measured by fund flow from operations (FFO) to interest, weakened to 4.4x at end-2011 from over 7x in 2010. In the absence of large materially debt-funded investments, Fitch expects CKI's FFO interest coverage to improve above 5.0x by 2013 as assets acquired in the last 18 months increase cash contributions to CKI.
Fitch believes that CKI will continue to pursue acquisition opportunities. Three equity-raising exercises totalling HKD8bn and completed since July 2011 should provide some headroom for smaller-size acquisitions such as the proposed HKD2.4bn investment in Wales & West Utilities Limited (senior secured: 'A-'/Stable).
The equity exercises have increased CKI's cash resources to HKD11bn in total cash and cash equivalents at end-June 2012, from HKD5.4bn at end-2010. Given the minimal headroom over Fitch negative rating guideline of FFO interest coverage of 5.0x, any large acquisition without adequate equity funding is likely to lead to a negative rating action.
What could trigger a rating action?
Negative: Future developments that may, individually or collectively, lead to negative rating action include
- Negative rating actions on CKI's parent, Hutchison Whampoa Limited ('A-'/Stable)
- FFO interest coverage falling below 5x on a sustained basis
- Given CKI's business and funding strategy, Fitch views that the rating has peaked at the current level. It therefore does not expect developments, individually or collectively, to lead to a rating upgrade in the short- to medium-term.
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