Hong Kong, December 14, 2017 -- Moody's Investors Service has changed to stable from negative the outlook
on State Grid International Development Limited's (SGID) A2 issuer rating
and senior unsecured debt ratings issued by State Grid Europe Development
(2014) Plc.
At the same time, Moody's has affirmed all ratings.
RATINGS RATIONALE
"The rating affirmation reflects Moody's view that SGID's
overall credit quality remains consistent with its A2 rating" says
Ivy Poon, a Moody's Vice President and Senior Analyst.
At the same time, the change in outlook to stable from negative
reflects (1) the removal of notching related to structural subordination,
offset by (2) a weakening in its standalone credit profile following the
sizable acquisition of the Brazilian company CPFL Energia S.A.
(CPFL, Ba1 negative).
"The combined effect of these two offsetting factors, plus
the maintenance of three notches of uplift in SGID's rating -
reflecting likely high support from SGID's parent, State Grid
Corporation of China (A1 stable) -- has led to the rating affirmation
and change in outlook to stable," says Poon.
The company's weakened standalone credit profile is mainly driven
by its increased exposure to emerging markets following the acquisition
of CPFL in Brazil (Ba2 negative).
Specifically, the completion of CPFL's acquisition in early
2017 has weakened SGID's asset quality, as its exposure to
emerging markets has risen to almost 70% of its adjusted EBITDA
in 2017.
"We expect SGID will maintain a lower quality asset portfolio,
driven by its increased exposure to emerging markets," adds
Poon.
Prior to the acquisition, SGID's asset portfolio focused more
on investment-grade companies in developed markets, which
accounted for 75% of its adjusted EBITDA in 2016.
The weakened asset quality is tempered by SGID's diversified investment
portfolio with quality cash flow from its investments in developed countries,
as well as CPFL's resilient business fundamentals and financial
profile.
Moody's expects SGID will continue to show a moderate financial
profile. Specifically, Moody's expects its funds from
operations (FFO)/debt will weaken to 11%-13% with
FFO interest coverage of 3.5x-4.0 over the next three
years, compared to three-year-average of 16%
and 4.9x in 2014-2016, respectively.
SGID's A2 issuer rating incorporates a three-notch uplift
from the company's standalone credit profile, based on the very
high level of support expected from its parent State Grid Corporation
of China.
Moody's expects SGID will continue to receive very high support
from State Grid, both financially and operationally.
The company is State Grid's sole platform for its internationalization
strategy, which is one of the parent's core strategies.
Its asset portfolio comprises high profile utilities in countries that
are significant to China's (A1 stable) diplomatic strategy and carries
high reputational risk for both the Chinese government and State Grid.
SGID's ratings are not affected by subordination to claims at the
consolidated level given Moody's expectation that support from State
Grid and/or the Chinese government will flow to SGID. This consideration
mitigates the structural subordination risk arising from the preponderance
of debt at SGID's subsidiaries.
The ratings outlook is stable, reflecting Moody's expectation
that (1) there will not be a significant shift in SGID's asset mix
in the next 12-18 months; (2) it will maintain a financial
profile that is within Moody's base case expectation; and (3)
support from State Grid will continue as and when needed.
Upward ratings pressure is limited, given SGID's business
profile and expected financial metrics.
Nevertheless, positive rating momentum on the standalone credit
profile could emerge over time if (1) cash flow from developed countries
accounts for over 70% for a sustained period; and/or (2) FFO
interest coverage exceeds 4.5x, and FFO/debt exceeds 18%
on a sustained basis.
SGID's issuer rating and standalone credit quality could come under downward
pressure if: (1) cash flow from emerging markets continues to account
for over 50-60%; (2) adverse changes occur in the regulatory
environments in which it operates; and/or (3) FFO interest coverage
falls below 2.0x, and FFO/debt below 8%-10%
over a sustained period.
Any evidence of weakening support from State Grid would also pressure
on SGID's ratings.
The principal methodology used in these ratings was Regulated Electric
and Gas Networks published in March 2017. Please see the Rating
Methodologies page on www.moodys.com for a copy of this
methodology.
State Grid International Development Limited is a wholly owned subsidiary
of State Grid Corporation of China. It is the sole investment platform
for its parent's overseas investments in the transmission and distribution
business, with key operations in Brazil and Australia.
State Grid Corporation of China is the largest public utility and power
grid company in the world in terms of revenue. It is 100%
owned by China's State-owned Assets Supervision and Administration
Commission.
REGULATORY DISCLOSURES
For ratings issued on a program, series or category/class of debt,
this announcement provides certain regulatory disclosures in relation
to each rating of a subsequently issued bond or note of the same series
or category/class of debt or pursuant to a program for which the ratings
are derived exclusively from existing ratings in accordance with Moody's
rating practices. For ratings issued on a support provider,
this announcement provides certain regulatory disclosures in relation
to the credit rating action on the support provider and in relation to
each particular credit rating action for securities that derive their
credit ratings from the support provider's credit rating.
For provisional ratings, this announcement provides certain regulatory
disclosures in relation to the provisional rating assigned, and
in relation to a definitive rating that may be assigned subsequent to
the final issuance of the debt, in each case where the transaction
structure and terms have not changed prior to the assignment of the definitive
rating in a manner that would have affected the rating. For further
information please see the ratings tab on the issuer/entity page for the
respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit
support from the primary entity(ies) of this credit rating action,
and whose ratings may change as a result of this credit rating action,
the associated regulatory disclosures will be those of the guarantor entity.
Exceptions to this approach exist for the following disclosures,
if applicable to jurisdiction: Ancillary Services, Disclosure
to rated entity, Disclosure from rated entity.
Regulatory disclosures contained in this press release apply to the credit
rating and, if applicable, the related rating outlook or rating
review.
Please see www.moodys.com for any updates on changes to
the lead rating analyst and to the Moody's legal entity that has issued
the rating.
Please see the ratings tab on the issuer/entity page on www.moodys.com
for additional regulatory disclosures for each credit rating.
The first name below is the lead rating analyst for this Credit Rating
and the last name below is the person primarily responsible for approving
this Credit Rating.
Ivy Poon
Vice President - Senior Analyst
Project & Infrastructure Finance
Moody's Investors Service Hong Kong Ltd.
24/F One Pacific Place
88 Queensway
Hong Kong
China (Hong Kong S.A.R.)
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077
Terry Fanous
MD-Public Proj & Infstr Fin
Project & Infrastructure Finance
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077
Releasing Office:
Moody's Investors Service Hong Kong Ltd.
24/F One Pacific Place
88 Queensway
Hong Kong
China (Hong Kong S.A.R.)
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077
