Hong Kong, September 01, 2021 -- Moody's Investors Service has assigned an A1 senior unsecured rating to
the proposed drawdown under the medium-term note (MTN) program
of State Grid Overseas Investment (BVI) Limited (formerly known as State
Grid Overseas Investment (2016) Limited), a wholly owned subsidiary
of State Grid Corporation of China (State Grid, A1 stable).
The proposed drawdown will be unconditionally and irrevocably guaranteed
by State Grid.
The outlook is stable.
State Grid intends to use the net proceeds from the notes for general
corporate purposes.
"The A1 rating of the proposed MTN drawdown reflect the irrevocable and
unconditional guarantee from State Grid," says Ivy Poon, a
Moody's Vice President and Senior Analyst.
"The proposed issuance will have a limited impact on State Grid's total
debt, because the proceeds will be used for refinancing and general
corporate purposes, which are incorporated in our projection,"
adds Poon.
RATINGS RATIONALE
State Grid's A1 rating primarily reflects its Baseline Credit Assessment
(BCA) of a1, which indicates its standalone credit quality.
The a1 BCA is underpinned by the company's highly resilient credit profile,
illustrated by its conservative balance sheet and enormous business scale,
which affords its near-monopoly status in a growing market;
and stable operating profile, which in turn is bolstered by its
proven operating track record and technological edge. These features
position State Grid well to manage challenges related to any temporary
tariff cuts, such as the one implemented in 2020 as part of the
government's initiative to manage the impact of coronavirus.
At the same time, the strength of the BCA is tempered by the short
history of the current transmission and distribution (T&D) regulatory
regime in China (A1 stable), introduced in 2015. Nevertheless,
Moody's has already incorporated this challenge in State Grid's
BCA, which is on par with China's sovereign rating.
Moody's expects State Grid's projected financial metrics to stay robust,
with the ratio of funds from operations (FFO) to debt likely around 40%
in the next two years, supported by the rebound of China's economy
and power demand. The company's strong credit metrics, along
with its excellent access to credit markets, provide it with considerable
financial flexibility.
The A1 ratings also consider Moody's assessment of a very high level of
dependence on and very high likelihood of support from the Government
of China in times of need. Moody's expectation of government
support is underpinned by State Grid's highly strategic function as the
sole operator for most of China's T&D grids, servicing over
88% of the country; the company's 100% government ownership;
and the reputational risks to the government should the company encounter
difficulties. The assessment also factors in the Chinese government's
strong ability to provide support, as reflected in the sovereign's
A1 rating.
In terms of environmental, social and governance (ESG) factors,
Moody's has considered that State Grid has relatively low carbon transition
risk within the utility sector, since it mainly owns and operates
the power grid and does not own thermal power generation facilities.
The company's proven operating track record mitigates its exposure to
accidents and environmental hazards. Its strong financial profile
provides a buffer for its sizable capital spending to expand and upgrade
the grid network, such that it can accommodate the increasing share
of renewables in power generation.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
The stable outlook on State Grid's rating incorporates Moody's expectation
that, over the next 12-18 months, its business profile
and credit metrics will remain at levels appropriate for its a1 BCA.
Moody's also expects that the company's important strategic
role and the Chinese government's ability to provide support will
remain intact, as reflected in the stable outlook on the sovereign
rating.
Moody's could upgrade State Grid's rating if the Chinese government's
ability to provide support strengthens, as reflected by an upgrade
of the sovereign rating.
The rating should remain resilient in the event of a weakening in State
Grid's BCA, given Moody's expectation of a very high likelihood
of government support. Accordingly, a downgrade of the BCA
from a1 to a2 may not necessarily lead to a downgrade in the A1 rating,
all other things being equal.
State Grid's BCA is strongly positioned and unlikely to experience
downward pressure in the near term. Over the longer term,
Moody's could downgrade the BCA in the event of a material deterioration
in its business or financial metrics, as indicated by its FFO/debt
falling below 35% on a consistent basis. Such a weakening
could result from (1) aggressive debt-funded expansion projects
or acquisitions; or (2) unexpected adverse changes in the tariff
mechanism that materially weaken the company's financial position.
Given that the BCA and rating are on par with the sovereign's rating,
Moody's could downgrade State Grid's rating if China's sovereign
rating is downgraded.
The methodologies used in these ratings were Regulated Electric and Gas
Utilities published in June 2017 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1072530,
and Government-Related Issuers Methodology published in February
2020 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1186207.
Alternatively, please see the Rating Methodologies page on www.moodys.com
for a copy of these methodologies.
State Grid Corporation of China (State Grid) is the largest public utility
and power grid company in the world in terms of revenue. The company
owns and operates most of China's national power grid network, servicing
88% of the mainland and a population of over 1.1 billion.
As of 31 March 2021, State Grid had total assets of RMB4.36
trillion.
The company is also a pioneer in the development and large-scale
commercial operation of UHV transmission and smart grid technologies.
It is also invested in power transmission projects overseas, such
as in Australia (Aaa stable), Brazil (Ba2 stable), Chile (A1
negative), Greece (Ba3 stable), Hong Kong SAR, China
(Aa3 stable), Italy (Baa3 stable), Oman (Ba3 negative),
the Philippines (Baa2 stable) and Portugal (Baa3 positive).
State Grid was established in 2003 and is 100% owned by the State-owned
Assets Supervision and Administration Commission (SASAC) under China's
State Council.
REGULATORY DISCLOSURES
For further specification of Moody's key rating assumptions and
sensitivity analysis, see the sections Methodology Assumptions and
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Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
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The first name below is the lead rating analyst for this Credit Rating
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Ivy Poon
VP - Sr Credit Officer
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
Yian Ning Loh
Associate Managing Director
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
