Dec 10 -
Summary analysis -- Cheung Kong Infrastructure Holdings Ltd. ------ 10-Dec-2012
CREDIT RATING: A-/Stable/-- Country: Hong Kong
Primary SIC: Heavy
Mult. CUSIP6: 166745
Credit Rating History:
Local currency Foreign currency
02-Jul-1997 A-/-- A-/--
The rating on Hong Kong-based Cheung Kong Infrastructure Holdings Ltd. (CKI)
reflects our view of the benefits the company derives as a core subsidiary of
the wider Cheung Kong group. The rating on CKI is equalized with that on
Hutchison Whampoa Ltd. (A-/Stable/--; cnAA/--), which owns 76.39% of CKI.
We assess CKI's stand-alone credit profile (SACP) as 'a-', reflecting the
company's "strong" business risk profile and "intermediate" financial risk
profile. CKI has stable cash flows due to investments in regulated utilities
in developed markets, a strong market position, and good portfolio diversity.
The company's above-average appetite for acquisitions and inherent
subordinated equity cash flows moderate these strengths.
The regulated utilities in the developed markets in which CKI has invested
have strong to excellent business risk profiles. These assets have a natural
monopoly in their service areas. The transparent and established regulatory
regimes in these markets are credit protective and result in steady and
predictable cash flows for the utility companies within each regulatory
In our view, the periodic regulation review of tariffs on regulated utilities
represents a major risk for CKI's investments in these markets and the cash
flows that the company derives from them. But CKI's diverse portfolio partly
mitigates such risk.
CKI's portfolio diversity has improved since the company led a consortium to
acquire and privatize the parent of the U.K. water utility company
Northumbrian Water Ltd. (BBB+/Stable/--) in October 2011 and also the
acquisition of Wales & West Utilities, a gas distributor in the U.K. CKI's
infrastructure investments have good diversity in terms of geography and
We believe CKI's U.K. assets will become the largest contributor to the
group's income as well as cash flows over the next two years, due to
significant contribution from UK Power Networks Holdings Ltd.
(BBB/Stable/--and Northumbrian Water. Profit contributions from the U.K.-based
assets rose 45% year-over-year for the first half of 2012. The U.K. assets
have begun contributing more profits to CKI than Power Assets Holdings Ltd.
(A+/Stable/--; cnAAA/--), which owns the electricity generation and
distribution monopoly in Hong Kong Island.
CKI's cash flow tends to be subordinated to third-party debt at the operating
company level. Nevertheless, tempering these risks are the company's
management and operational control over these investments, its flexibility and
willingness to divest when needed, and the size and diversity of its
portfolio. We believe the company may provide capital for expansion and
liquidity support to these projects when it sees it fit to continue to invest
In our opinion, CKI's above-average appetite for acquisitions and the
financing of recent acquisitions primarily through debt have weakened its
We expect CKI's financial performance to improve in 2012 compared with a year
ago following contribution from the Northumbrian Water acquisition. At the
corporate level, we anticipate that CKI's ratio of adjusted funds from
operations (FFO) to debt will improve to about 25%-28% at the end of 2012 from
19.7% a year ago. Its FFO interest coverage may rise to about 7x from 5.6x. In
the absence of large debt-funded acquisitions, we expect CKI's adjusted
FFO-to-debt ratio to improve to over 30% over the next two years due to the
FFO contribution from Northumbrian Water and its other U.K. assets. We
consider the US$1 billion in perpetual capital securities that CKI issued in
September 2010 as having "intermediate" equity content, and treat 50% of the
principal as equity and 50% as debt in our calculation of financial ratios.
We analyze CKI's adjusted cash flow protection at both the corporate and the
group level; when analyzing group-level metrics, we consolidate the company's
key investments in associates, which mostly have "significant" financial risk
We view CKI's liquidity as "strong," as defined in our criteria underpinned by
recurring cash flows from dividends. The company's liquidity sources should
exceed its uses by more than 2x for the next 12 months. Our liquidity
assessment is based on the following factors and assumptions:
-- The company's near-term liquidity sources include cash and bank
deposits of Hong Kong dollar (HK$) 8,711 million as of June 2012, and our FFO
forecast of HK$5,900 million. In 2012, CKI raised HK$4.6 billion through share
placements and US$300 million (about HK$2.3 billion) by issuing perpetual
securities. We estimate the company's current cash and bank deposits at about
-- Liquidity uses include estimated dividends of about HK$3,900 million
and committed capital expenditure of around HK$350 million.
-- We believe CKI's net sources should remain positive, and the company
will be in compliance with its financial covenants even if EBITDA declines by
-- CKI has good banking relationships and access to the capital markets,
which helps it to maintain strong financial flexibility.
We note that CKI's investment portfolio mostly comprises listed equities and
listed notes issued by corporate entities with investment-grade ratings. The
portfolio has a fair market value of HK$5,509 million as of June 30, 2012. We
do not include these securities in our liquidity calculation. Nevertheless, we
believe these marketable securities can boost CKI's liquidity, if needed.
The stable outlook reflects CKI's business risk profile and the outlook on the
company's parent, Hutchison Whampoa. The stable outlook also reflects our
expectation that CKI will carefully manage its debt leverage while
contemplating new investments.
We may lower the rating on CKI if: (1) we downgrade the company's parent; or
(2) CKI's SACP deteriorates materially, adversely affecting the parent's
We could lower CKI's SACP if: (1) the credit profiles of the company's major
invested entities deteriorates substantially; or (2) CKI's investment risk
appetite increases with more debt-funded acquisitions, which will reduce the
company's credit strength by increasing leverage more than we expect. An
adjusted FFO interest coverage at the corporate level of less than 5x or an
adjusted FFO-to-debt ratio of less than 20% on an ongoing basis would indicate
an increase in risk appetite.
We see only a limited potential to raise the rating on CKI unless we upgrade
the parent. CKI's debt-funded acquisition strategy currently caps the
potential upside to the SACP.