(The following statement was released by the rating agency)
June 15 - Fitch Ratings has affirmed CLP Holdings Limited’s (CLPH) and CLP Power Hong Kong Limited’s (CLP HK) Long-Term Foreign and Local Currency Issuer Default Ratings (IDRs) at ‘A’. The Outlook is Stable. Simultaneously, Fitch has affirmed CLPH’s and CLP HK’s Short-Term Foreign Currency IDRs at ‘F1’.
Fitch considers the links between CLP HK and CLPH to be strong and therefore takes a consolidated approach in its rating assessment. As a result, the ratings of CLP HK are constrained at CLPH’s rating level.
CLPH’s ratings primarily reflect its stable and predictable recurring cash inflows from regulated electricity assets. Its principal 100%-owned subsidiary, CLP HK, is operating in a transparent regulatory environment. CLP HK has a monopoly in the electricity business in Kowloon and the New Territories of Hong Kong. The subsidiary accounts for around 60% of CLPH’s total adjusted EBITDA and provides substantial dividends inflows.
In addition, CLPH benefits from its geographically diversified and vertically integrated electricity business, especially after the completion of its HKD16bn acquisition of some Australian energy assets in March 2011, although this led to an increase in financial leverage. In addition, the group has generation assets in China, India, Thailand, and Taiwan. Nevertheless, a growing share of non-regulated assets has increased the overall business risk profile of the group with exposure to market risks, despite achieving greater geographical diversification.
CLPH’s strong cash flow generating capacity should help the group to gradually pay down the debt incurred for capex and large-scale overseas acquisitions. However, there is a risk that increasingly challenging carbon-related regulations may lead to higher capex, which may slow down the de-leveraging process.
The ratings have not factored in CLPH’s potential joint additional investment with China Power Southern Grid Co., Ltd in its currently 40%-owned Castle Peak Power Co. Ltd. (CAPCO). The ratings also have not reflected CLPH’s potential listing of its 100%-held TRUenergy Holdings Pty Ltd in Australia, which can result in large cash inflow for the group. Fitch would treat these as event risks and assess their impact as and when they occur.
CLPH’s liquidity is sound. At end-2011, undrawn committed facilities amounted to HKD24.4bn, reflecting the company’s blue-chip status in Hong Kong and its longstanding relationships with banks. Stable recurring funds from operations (FFO) (2011: HKD17.6bn), healthy cash-on-hand (HKD3.9bn), and moderate leverage (FFO-adjusted net leverage: 3.2x; including 40% of CAPCO’s debt) should be more than sufficient in helping the company manage its debt of HKD 9.3bn debt falling due during 2012 and 2013.
Negative rating action may result from substantial increase in business risks, including due to significant adverse regulatory changes, or sustained deterioration in credit metrics stemming from heavy debt-led capex. A material weakening in credit metrics would be manifested in FFO-adjusted net leverage rising above 3.5x or FFO gross interest coverage falling below 5x (2011: 6.2x). Conversely, Fitch may take a positive rating action should CLPH’s FFO-adjusted net leverage fall below 2.5x or FFO gross interest coverage rise above 8x on a sustained basis while maintaining a strong business risk profile. However, the likelihood of a rating upgrade in the next 18 to 24 months is limited. Since CLP HK’s ratings are constrained by CLPH, a rating action on the parent will result in a corresponding action on CLP HK.