Hong Kong, December 01, 2020 -- Moody's Investors Service has assigned an A2 senior unsecured rating to
the proposed guaranteed perpetual capital securities to be issued by China
Huaneng Group (Hong Kong) Treasury Management Holding Limited (CHGHK)
and guaranteed by China Huaneng Group Co., Ltd. (CHGC,
A2 stable).
The rating outlook is stable.
CHGC will use the net proceeds from the perpetual securities to refinance
existing debt.
The perpetual securities will not have a material impact on CHGCs overall
credit profile — if they are issued as planned — because the
scale of the issuance will be manageable for CHGC, and part of it
will refinance existing debt.
RATINGS RATIONALE
"The A2 rating on the proposed guaranteed perpetual capital securities
reflects the fact that CHGC's unconditional and irrevocable guarantee
will represent an unsecured and unsubordinated obligation for the group,"
says Boris Kan, a Moody's Vice President and Senior Credit Officer.
Obligations under the guarantee will rank pari passu with CHGC's existing
and future unsecured and unsubordinated obligations. Therefore,
the A2 rating is at the same level as CHGC's A2 issuer rating.
CHGC's A2 issuer rating combines its baseline credit assessment (BCA)
of ba1 and a five-notch uplift based on the very high likelihood
of support from, and a very high level of dependence on, the
Chinese government (A1 stable) in times of need, under Moody's joint-default
analysis approach for government-related issuers.
The five-notch uplift reflects CHGC'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.
CHGC's ba1 BCA reflects its leading position as one of the largest power
generation companies in China, with a diversified fuel mix and geographical
spread. Such position provides CHGC with significant operating
flexibility, providing key credit support.
At the same time, the company's BCA considers its high financial
leverage, the evolving regulatory regime, the challenging
operating environment, and its moderate exposure to coal mining
and financial services operations.
Moody's considers the proposed guaranteed perpetual securities as
debt even though they contain certain hybrid-like features,
such as the option of deferred coupons on a cumulative basis. Such
a view is based on the fact that the step-up cost creates a strong
incentive for the company to prepay the securities the first call date
in 2025.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
The stable outlook reflects Moody's expectation that (1) CHGC will maintain
its current credit profile and financial metrics; (2) changes in
the regulatory framework for China's power sector will remain largely
manageable; and (3) support from the central government will remain
intact over the next two to three years, given the company's systemic
importance and status as one of the core central state-owned enterprises
(SOEs).
CHGC's issuer rating could be upgraded if its BCA improves significantly.
Moody's would raise CHGC's BCA if (1) it successfully deleverages,
such that its FFO/debt exceeds 13.5% or debt/capitalization
falls below 65% on a sustained basis; or (2) the regulatory
regime turns more predictable and supportive over time.
The rating on the proposed securities will be upgraded if CHGC's issuer
rating is upgraded.
The rating on CHGC and the proposed securities could be downgraded if
(1) central government support weakens; (2) the company's BCA weakens
because of a material deterioration in its business or financial profile,
without any material change in the support assessment.
CHGC's BCA could be lowered as a result of (1) adverse changes in
China's regulatory environment; (2) further aggressive debt-funded
expansions or mergers, especially in renewable capacity; or
(3) a significant rise in business risk from the development of its financial
services and coal-mining businesses.
Financial metrics indicative of a downgrade include CHGC's FFO/debt
remaining below 6.0% or debt/capitalization staying above
80% over a prolonged period.
The rating on CHGC and the proposed 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. The rating could also be downgraded if CHGC's issuer
rating is downgraded.
The ratings also take into account the following environmental,
social and governance (ESG) considerations.
CHGC faces elevated carbon transition risk in its coal-fired generation
and coal mining businesses. This risk is partially mitigated by
CHGC's increased focus on renewable capacity expansion over the past three
years and going forward.
CHGC faces moderate social risk 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 CHGC's financial
policy, which is characterized by high capital spending and financial
leverage. But this risk is mitigated by Chinese government's targets
around maintaining low SOE financial leverage.
The methodologies used in these ratings 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 Huaneng Group Co., Ltd. (CHGC) is one of the
central government-owned power producers in China, accounting
for 9% of national installed capacity. The company is 90%
owned by the State-Owned Assets Supervision and Administration
Commission of the State Council (SASAC) and 10% owned by the Social
Security Funds. CHGC's chairman is directly appointed by the Organization
Department of the Communist Party of China.
CHGC had a consolidated installed capacity of 182.8 gigawatts (GW)
as of the end of December 2019. In addition to power generation
and heating, which accounted for 80% of its revenue in 2019,
CHGC also engages in coal mining and financial service businesses,
which accounted for 4% and 3% of its revenue.
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.
For ratings issued on a program, series, category/class of
debt or security this announcement provides certain regulatory disclosures
in relation to each rating of a subsequently issued bond or note of the
same series, category/class of debt, security or pursuant
to a program for which the ratings are derived exclusively from existing
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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
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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.
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if applicable to jurisdiction: Ancillary Services, Disclosure
to rated entity, Disclosure from rated entity.
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Regulatory disclosures contained in this press release apply to the credit
rating and, if applicable, the related rating outlook or rating
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Moody's general principles for assessing environmental, social
and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.
The Global Scale Credit Rating on this Credit Rating Announcement was
issued by one of Moody's affiliates outside the EU and is endorsed
by Moody's Deutschland GmbH, An der Welle 5, Frankfurt
am Main 60322, Germany, in accordance with Art.4 paragraph
3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies.
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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.
Boris Kan
VP - Senior 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
Terry Fanous
MD-Public Proj & Infstr Fin
Project & Infrastructure Finance
JOURNALISTS: 61 2 9270 8141
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
