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Rating Action:

Moody's assigns A2 to State Power Investment's MTN drawdown

 The document has been translated in other languages

21 Jul 2020

Hong Kong, July 21, 2020 -- Moody's Investors Service has assigned an A2 senior unsecured rating to the proposed drawdown under State Power Investment Corporation Limited's (SPIC, A2 stable) multi-issuer medium term note (MTN) program, which is issued by SPIC MTN Company Ltd. (the Issuer), and guaranteed by SPIC.

The rating outlook is stable.

SPIC will use the net proceeds from the MTN program for working capital, refinancing and general corporate purposes.

RATINGS RATIONALE

The A2 senior unsecured rating on the MTN drawdown reflects the fact that SPIC's unconditional and irrevocable guarantee will represent an unsecured and unsubordinated obligation for the group. Obligations under the guarantee will rank pari passu with SPIC's existing and future unsecured and unsubordinated obligations. Therefore, the A2 rating is at the same level as SPIC's A2 issuer rating.

Moody's also expects that the size of the drawdown will be manageable as compare with the size of SPIC's total debt, therefore will not affect SPIC's A2 issuer rating.

SPIC's A2 issuer rating combines its Baseline Credit Assessment (BCA) of ba2 and a six-notch uplift based on the very high likelihood of support from, and the very high dependence on the Government of China (A1 stable), under Moody's Joint Default Analysis approach for government-related issuers.

The six-notch uplift is based on Moody's expectation of a very high likelihood of central government support, based on SPIC's high systemic importance as one of the nation's major electricity suppliers, and its full ownership and direct supervision by the central government, with a strong track record of government support. The company's strategic importance is further strengthened by its expertise in nuclear technology.

SPIC's ba2 BCA reflects its leading position as one of the largest state-owned power generation companies in China, with a diversified fuel mix that benefits from favorable renewable energy policies. However, the company's BCA is constrained by its high level of financial leverage, an evolving regulatory regime that is transitioning to a predominantly market-based tariff regime, its exposure to volatile coal mining and aluminum smelting operations, and the execution risks stemming from its overseas expansion projects.

SPIC's stable rating outlook reflects Moody's expectations that over the next 12-18 months, (1) the company will maintain its current credit profile and financial metrics; and (2) the central government support is unlikely to change materially, given the company's systemic importance, technological strengths and status as one of the core central state-owned enterprises.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATING

An upgrade of SPIC's issuer rating is unlikely, given that the very high likelihood of government support is already reflected in the rating assessment. However, the company's BCA could be upgraded if (1) it successfully deleverages, such that its funds from operations (FFO)/debt exceeds 7.5% or its debt/capitalization falls below 65% on a sustained basis; or (2) Moody's sees a more supportive regulatory regime over time.

SPIC's issuer rating could be downgraded if (1) Moody's believes that central government support will weaken; or (2) the company's standalone credit profile deteriorates as a result of material adverse changes due to market liberalization, changes in the regulatory environment, and further aggressive debt-funded expansions or mergers, or (3) there's a significant rise in business risks stemming from its development of nuclear technology or overseas operations.

Financial metrics indicative of a downgrade includes SPIC's FFO/debt staying below 5% or debt/capitalization staying above 85% for a prolonged period.

The ratings also consider the following environmental, social and governance (ESG) factors.

SPIC faces elevated carbon transition risk in its coal-fired generation and coal mining businesses. This risk is partially mitigated by SPIC's increasing focus on clean energy expansion.

SPIC faces moderate social risk in terms of worker health and safety in relation to its construction and operation of power projects. Its US-originated nuclear technology faces execution challenges with regards to construction, public acceptance of nuclear power facilities, and uncertainties related to the US-China conflict.

In terms of governance risk, Moody's has considered SPIC'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 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.

State Power Investment Corporation Limited (SPIC) is 90% owned by the State-owned Assets Administration and Supervision Commission (SASAC) of the China central government, and 10% owned by Social Security Funds. Its chairman is directly appointed by the State Council.

SPIC is one of the five largest power generation companies in China, accounting for 7.5% of the national installed capacity. As of the end 2019, the company had a total installed capacity of 151 gigawatts (GW), of which 54% was thermal, 16% hydro and 30% other clean energy or renewables.

SPIC is the sub-licensing rights owner of the AP1000 and CAP1400 nuclear technology and is one of the three central SOEs that has control of and ownership in nuclear power plants.

In addition to power generation, SPIC engages in coal mining and aluminum smelting, which accounted for 65%, 2% and 21% of its revenue and 81%, 3% and 6% of its gross profit as of the end 2019, respectively.

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 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.

The rating has been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

This rating is solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

Moody's considers a rated entity or its agent(s) to be participating when it maintains an overall relationship with Moody's. Unless noted in the Regulatory Disclosures as a Non-Participating Entity, the rated entity is participating and the rated entity or its agent(s) generally provides Moody's with information for the purposes of its ratings process. Please refer to www.moodys.com for the Regulatory Disclosures for each credit rating action under the ratings tab on the issuer/entity page and for details of Moody's Policy for Designating Non-Participating Rated Entities.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

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. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

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.

Ada Li
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: 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

No Related Data.
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