RPT-Fitch Places Hong Kong's Cheung Kong Infrastructure on RWN
(Repeat for additional subscribers)
Sept 30 (Reuters) - (The following statement was released by the rating agency)
Fitch Ratings has placed Hong Kong-based Cheung Kong Infrastructure Holdings Limited's (CKI) Foreign-Currency Long-Term Issuer Default Rating (IDR) of 'A-' on Rating Watch Negative (RWN). Simultaneously, CKI's senior unsecured rating of 'A-' and the 'BBB' rating on its USD300m fixed-rate callable perpetual securities issued in February 2012 have been placed on RWN.
The rating action follows the announcement that Power Asset Holdings (PAH), in which CKI has a 38.9% stake, plans to reduce its 100% shareholding in the regulated Hong Kong Electric Company (HKE), the highest quality asset in CKI's portfolio and the single largest dividend contributor (via PAH) to the company. PAH plans to reduce its HKE stake to between 30% and 49.9% through a spin-off and a separate listing for HKE.
The RWN on CKI's ratings reflect Fitch's view the LT IDR is likely to be downgraded by one notch to 'BBB+', should the transaction close as proposed. Although CKI's management has indicated that the total dividends to CKI from PAH will not fall from 2012 levels (HKD1,960m) in 2013 and 2014, the overall quality of CKI's cash flows and hence its business risk profile would be negatively affected should the transaction go ahead. This is due to the stability and quality of dividends from PAH diminishing with the spin-off of HKE. PAH dividends now contribute around a third of CKI's cash inflow.
HKE is a regulated integrated utility in Hong Kong, operating under a transparent regulatory framework, the Scheme of Control (SoC), which allows a permitted rate of return and operating cost-pass through until 2018. HKE currently constitutes PAH's core business but PAH also has non-majority stakes in a number of international regulated utility assets from which it receives dividends.
While PAH can make up for the loss of pay-outs from HKE with cash from the divestment of its HKE stake to maintain its dividend payments in the short-term, the dividends over the longer-term will depend on PAH's investments and returns generated using the cash proceeds from the proposed spin-off of HKE.
Positively, PAH will receive a potentially large amount of cash following the transaction and it can avert any cash calls on shareholders such as CKI to support its growth in the medium term. PAH intends to use the cash to acquire international power assets, which can potentially contribute overall to a weakened quality of cash inflows to PAH, compared with pre-transaction, and therefore also to CKI over the medium-term.
The spin-off is subject to the various approvals, including from shareholders and the Hong Kong stock exchange, and contingent on a final Board decision. Fitch would expect the transaction to close by December at the earliest, should it receive all approvals.
CKI's ratings are underpinned by its stable and predictable income stream from a diversified portfolio of investments made up mainly of regulated utility assets. Pre-transaction, cash flow contributions from regulated utility assets accounted for a material proportion of CKI's cash inflows (FY12: 85%). Key contributors included Power Asset Holdings in Hong Kong; UK Power Networks Holdings Ltd, Northumbrian Water Group, and Northern Gas in the UK; and SA Power Networks/Powercor/Citipower in Australia.
CKI faces structural subordination risk as its funds from operations (FFO) are largely derived from upstream dividends and interest received on shareholders' loans. While CKI has less than controlling stakes in its key investments, it jointly invests - typically with Power Asset Holdings (PAH), - as well as with other affiliates in the Cheung Kong group, thus maintaining strong control of its major associate and joint-venture investments.
CKI's investments in the last two years while increasing the diversity of its investments have reduced the overall average credit quality of its investment portfolio. Fitch had cautioned investors for some time that CKI has little headroom under the negative guidelines - primarily its funds flow from operations to interest coverage of 5.0x - for its current rating of 'A-'.
Negative: Future developments that may collectively or individually lead to negative rating actions:
The downgrade of CKI's LT-IDR by one notch to 'BBB+':
- The transaction (spin-off of HKE) closing as proposed
The removal of the RWN:
- The transaction does not close and provided that
- FFO interest cover of 5.0x on a sustained basis (FY12: 3.9x; expected to be around 5x in FY13-15); current quality of cash inflow from investments remain intact; and not constrained by parent, Hutchison Whampoa Limited' s rating currently 'A-'/Stable
- Obama and Castro shake hands, Zuma humiliated at Mandela memorial |
- Google bus blocked in San Francisco gentrification protest
- Reporter can keep sources secret in Colorado theater shooting: court
- Couple, four children missing in Nevada found safe in canyon
- Regulators seek to curb Wall St. trades with Volcker rule |