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Rating Action:

Moody's assigns A3 to CLP Power's proposed hybrids and changes its outlook to stable

 The document has been translated in other languages

28 Apr 2014

Hong Kong, April 28, 2014 -- Moody's Investors Services has assigned an A3 rating with a stable outlook to the perpetual subordinated guaranteed capital securities to be issued by CLP Power HK Finance Ltd., and irrevocably and unconditionally guaranteed on a subordinated basis by CLP Power Hong Kong Limited (CLPP, A1 stable).

At the same time, the outlooks of CLPP and CLP Power Hong Kong Financing Limited have been changed to stable from negative. On the other hand, the outlook for CLPH remains negative.

At the same time, Moody's has affirmed the following long term issuer ratings:

1. CLPP at A1; and

2. CLP Holdings Limited (CLPH) at A2.

Moody's has also affirmed CLP Power Hong Kong Financing Limited's A1 senior unsecured debt rating.

In addition, Moody's has affirmed the P-1 short term ratings for the following companies:

1. CLPP; and

2. CLPH.

Moreover, Moody's has affirmed the (P)A1 rating and (P)P-1 rating for CLP Power Hong Kong Financing Limited's senior unsecured MTN program.

RATINGS RATIONALE

The A3 rating assigned to the proposed perpetual subordinated guaranteed capital securities reflects the cumulative and deeply subordinated nature of the planned securities. Moody's considers these securities as hybrid instruments, with debt and equity components.

"The planned hybrid issuance shows CLPP's commitment to maintain a stable financial profile, against the backdrop of its sizable acquisition," adds Poon.

The proceeds of the planned hybrid securities will be used for general corporate purposes.

In addition, the financing arrangement for the acquisitions includes HKD5 billion in shareholder loans from CLPH, HKD5 billion 2-year bridge loan and HKD4 billion from internal cash resources. CLPH also did HKD2.8 billion of asset disposal in early April. These funding sources alleviate pressure on CLPP's credit metrics. Moody's believes CLPP's financial profile over the next three years will be consistent with its A1 issuer rating.

On 19 November 2013, CLPP reached an agreement to acquire a 30% stake in Castle Peak Power Company Limited (CAPCO, unrated) and a 51% stake in Hong Kong Pumped Storage Development Company, Limited (PSDC, unrated). The total cash consideration for the two acquisitions totals HKD14 billion.

"CLPP's rating outlook has changed to stable because the acquisitions would strengthen its operating profile without compromising its projected credit metrics based on the proposed financing arrangement, " says Poon, adding, "Moreover, we believe the prevailing negative credit developments associated with CLPH's overseas business would not adversely affect CLPP's issuer rating."

The acquisitions of CAPCO and PSDC will better integrate CLPP's assets and provide the company with majority control over its key generation assets.

Moody's expects CLPP's stable regulated cash flows and financing arrangement for the announced acquisitions will partially meet the funding it requires for its planned acquisition such that the projected credit metrics will be consistent with its current rating level.

Moody's estimates fund from operation (FFO)/ debt will be 20% - 30%, FFO interest coverage will be 6x - 10x, debt/ capitalization will be around 45% over the next three years.

Despite its status as a wholly owned subsidiary, CLPP is engaged in highly regulated operations under close supervision by the government, thereby constraining its ability to make excessive cash contributions to the parent that would jeopardize its financial health. CLPP has in the past reduced its dividend payments to CLPH to meet targeted gearing ratios.

Moreover, the independent financing arrangements within the CLP Group indicate that difficulties experienced by one entity would unlikely trigger events of default for other entities within the Group.

The borrowings of CLPP and other operating subsidiaries are arranged on a standalone basis, without corporate guarantees from their parent or cross default clauses.

The upgrade pressure for CLPP's ratings is remote in the near term given the stable regulatory environment and predictable financial profile. Nevertheless, the key metrics that Moody's would consider for an upgrade include FFO/ debt rises above 30% - 40% and debt/ capitalization below 30% on a sustained basis.

The rating could be downgraded if CLPP's credit strength deteriorates substantially due to (1) adverse change in the regulatory environment, and (2) weakening in its operator profile. The key metrics that Moody's would consider for a downgrade include FFO/interest coverage falls below 4.0x, FFO/ debt falls below 15% and debt/ capitalization in excess of 45% on a sustained basis. The credit metrics are adjusted for full consolidation of CAPCO and PSDC.

Also, a material deterioration in the credit profile of CLPH will trigger a review on CLPP's ratings.

In contrast, CLPH's ratings outlook will likely remain negative after the completion of the acquisitions of CAPCO and PSDC, given the uncertainties related to its overseas operations -- especially the Australian operations will continue to face a challenging operating environment -- over the next 12-18 months. As a result, Moody's expects CLPH's credit metrics to be marginal for its A2 rating.

The principal methodology used in these ratings was Regulated Electric and Gas Utilities published in December 2013. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

CLP Holdings Limited, headquartered and listed in Hong Kong, operates its electric utility business through its wholly owned subsidiary, CLP Power Hong Kong Limited. The group also has a growing portfolio of electricity generation investments across Asia Pacific.

CLP Power Hong Kong Limited, a wholly owned and principal subsidiary of CLP Holdings Limited, is a vertically integrated electricity generation, transmission and distribution company in Hong Kong. It is regulated by the government under the scheme of Control Arrangement. The company has a de facto monopoly over Kowloon and the New Territories, which altogether account for over 80% of Hong Kong's population.

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 rating action on the support provider and in relation to each particular 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 rating action, and whose ratings may change as a result of this 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
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
SUBSCRIBERS: (852) 3551-3077

Patrick Mispagel
Associate Managing Director
Project & Infrastructure Finance
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (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
SUBSCRIBERS: (852) 3551-3077

Moody's assigns A3 to CLP Power's proposed hybrids and changes its outlook to stable
No Related Data.
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