Hong Kong, June 15, 2020 -- Moody's Investors Service has assigned an A2 senior unsecured rating to
the proposed senior guaranteed perpetual securities to be issued by China
Huadian Overseas Development 2018 Limited and guaranteed by China Huadian
Corporation LTD. (CHD, A2 stable).
The outlook is stable.
The proceeds from the USD senior guaranteed perpetual securities will
be used for the group's overseas projects and general corporate
purposes.
RATINGS RATIONALE
The A2 rating reflects the fact that the proposed senior guaranteed perpetual
securities will rank at least equal to other unsecured unsubordinated
obligations of CHD.
"The perpetual securities will not have a material impact on CHD's overall
credit profile — if they are issued as planned — because the
scale of the issuance will be manageable for CHD," says Boris Kan,
a Moody's Vice President and Senior Credit Officer.
"We consider the proposed senior guaranteed perpetual securities as debt
even though they contain certain hybrid-like features, such
as the option of deferred coupons on a cumulative basis," adds Kan.
"Our view is based on the fact that the step-up cost has created
a strong incentive for the company to prepay the securities upon the first
call date in 2025."
The rating on the securities could be downgraded if Moody's assesses that:
(1) the company is likely to defer a large number of coupon payments in
advance of default; or (2) debt with deferral features becomes a
substantial part of the company's capital structure.
CHD's A2 issuer rating combines its Baseline Credit Assessment (BCA) of
ba1 and a five-notch uplift based on Moody's expectation that the
company will receive a very high level of support from the Government
of China (A1 stable), in times of need. Under Moody's Joint
Default Analysis approach for government-related issuers,
Moody's also assesses that CHD has a 'very high' level of dependence on
the Chinese government.
The five-notch uplift reflects CHD's high systemic importance as
one of the largest state-owned power generation companies in China,
and its full ownership and direct supervision by the central government,
with a strong track record of government support.
CHD's ba1 BCA reflects its leading position as one of the five largest
generation companies in China, with a diversified fuel mix and geographic
spread. However, the company's BCA is constrained by (1)
its high financial leverage; (2) an evolving regulatory regime where
a new tariff mechanism introduced by the government, effective since
January 2020, will add price volatility; and (3) its moderate
exposure to coal mining and financial services operations.
The stable outlook reflects our expectations that (1) the company will
maintain its current credit profile and financial metrics, (2) regulatory
framework changes in China's power sector will remain largely manageable;
and (3) support from the central government is unlikely to change in the
coming years because of the company's systemic importance and status
as a core central state-owned enterprise.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATING
Moody's would upgrade CHD's ratings if its BCA improves significantly.
The company's BCA could rise if (1) it deleverages successfully,
such that adjusted funds from operations (FFO)/debt exceeds 13.5%
or debt/capitalization falls below 65% on a sustained basis;
or (2) there is a track record of a predictable and supportive regulatory
regime over time.
Moody's would downgrade CHD's ratings if the company's BCA weakens because
of a significant deterioration in its business or financial profile,
without any material change in the support assessment.
The BCA could be lowered as a result of (1) adverse changes in China's
regulatory environment, including more electricity to be sold under
a market-driven mechanism with its inherent price volatility;
(2) further aggressive debt-funded expansions or mergers;
or (3) a significant rise in risk for CHD's business operations from the
development of its financial services and coal mining businesses.
Credit metrics indicative of downward pressure on the company's BCA include
adjusted FFO/debt falling below 6.0% or debt/capitalization
rising above 80% for a prolonged period.
Moody's could also downgrade CHD's ratings, without lowering
its BCA, if there are signs of weakening support from the central
government.
The ratings also consider the following environmental, social and
governance (ESG) factors.
CHD faces elevated carbon transition risk in its coal-fired generation
and coal mining businesses. This risk is partially mitigated by
CHD's increased focus on renewable capacity expansion over the past three
years and going forward.
CHD faces moderate social risks in terms of worker health and safety in
relation to its construction and operation of power projects.
In terms of governance risk, Moody's has considered CHD's financial
policy, which is characterized by high capital spending and financial
leverage.
The methodologies used in this rating were Unregulated Utilities and Unregulated
Power Companies published in May 2017 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1066389,
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.
China Huadian Corporation LTD. (CHD) is one of the five biggest
central government-owned power producers in China, accounting
for around 8% of the national installed capacity. The company
is 100% owned by the Chinese central government and supervised
by the State-owned Assets Supervision and Administration Commission
(SASAC), and its chairman was directly appointed by the State Council.
CHD had a consolidated installed capacity of 153.1 gigawatts (GW)
as of the end of December 2019, of which 59.6% was
coal-fired power, 11.1% was gas-fired
power, 17.8% was hydro power and 11.4%
was other clean or renewable sources of power.
In addition to power generation, CHD engages in coal mining and
other businesses such as engineering and construction, and financial
services.
REGULATORY DISCLOSURES
For further specification of Moody's key rating assumptions and
sensitivity analysis, see the sections Methodology Assumptions and
Sensitivity to Assumptions in the disclosure form. Moody's
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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this Credit Rating.
Boris Kan
VP - Senior Credit Officer
Project & Infrastructure Finance
Moody's Investors Service Hong Kong Ltd.
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China (Hong Kong S.A.R.)
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Terry Fanous
MD-Public Proj & Infstr Fin
Project & Infrastructure Finance
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
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Moody's Investors Service Hong Kong Ltd.
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