Hong Kong, December 01, 2021 -- Moody's Investors Service has assigned a Baa1 rating to the proposed preference
shares to be issued by SPIC Preferred Company No. 2 Ltd.
(the issuer), a wholly owned subsidiary of State Power Investment
Corporation Limited (SPIC, A2 stable). The proposed preference
shares are supported by structural features including intragroup financing
arrangements that benefit from guarantees from SPIC and a keepwell deed
from SPIC in favor of the preference shares.
The rating outlook is stable.
The issuer intends to on-lend the entire proceeds from the offering
to SPIC or SPIC's subsidiaries pursuant to the Intragroup Financing Agreements
for the refinancing of existing indebtedness and general working capital.
The intragroup financings will be in form of a perpetual senior loan to
SPIC or its subsidiaries; the due amount of which will be unconditionally
and irrevocably guaranteed by SPIC.
RATINGS RATIONALE
"The Baa1 rating on the preference shares is two notches below SPIC's
A2 issuer rating, reflecting the typically junior subordinated position
of preference shares, and also underpinned by SPIC's credit quality,"
says Ada Li, a Moody's Vice President and Senior Credit Officer.
"The intragroup financings arrangements are underpinned by unconditional,
irrevocable senior unsecured guarantee provided by SPIC to the issuer,
in support of the intergroup loan that the issuer will extend upon issuance
of the preferred stock instrument," adds Li.
Because of the supportive structural features provided by SPIC,
Moody's has used SPIC's A2 issuer rating as reference for rating the preference
shares, before notching the rating down to Baa1 to reflect the subordinated
position of the instrument.
Moody's expects that the size of the proposed preference shares issuance
will be manageable as compared with the size of SPIC's total debt,
given that it will be used mainly to refinance existing group debt;
therefore, the issuance 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.
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. It is also exposed to physical climate
risks from power generation in general, and waste and pollution
risks in relation to its nuclear power business. Such risk is partially
tempered by SPIC's increasing focus on clean energy expansion.
SPIC faces moderate social risk in terms of likely regulatory intervention
on tariff, 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 full
government ownership, and its aggressive financial policy,
which is characterized by high capital spending and financial leverage.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATING
SPIC's rating and BCA could be upgraded if 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 there is evidence of a more supportive regulatory regime over time.
SPIC's issuer rating could be downgraded if the likelihood of central
government support weakens; the company's standalone credit profile
deteriorates as a result of significant adverse changes because of market
liberalization or changes in the regulatory environment and further aggressive
debt-funded expansions or mergers; or there is a significant
rise in business risks stemming from its development of nuclear technology
and overseas operations.
Financial metrics that could lead to a rating downgrade include FFO/debt
below 5.0% or debt/capitalization above 85% on a
sustained basis.
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 Feb 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 one of the "big five"
central government-owned power producers in China. The company
is 90% owned by the State-owned Assets Administration and
Supervision Commission (SASAC) of the Chinese government, and 10%
owned by Social Security Funds.
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 of December 2020. The company had a total installed
capacity of 176 gigawatts (GW), of which 48% was thermal,
14% hydro and 38% other clean energy or renewables.
SPIC is the sub-licensing rights owner of the AP1000 and Guohe1/CAP1400
nuclear technology, and one of the three central SOEs that have
control of and ownership in nuclear power plants.
SPIC engages in power generation, coal mining and aluminum smelting,
which accounted for 55%, 4% and 21% of its
revenue and 75%, 12% and 3% of its gross profit
for the first half of 2021, respectively.
REGULATORY DISCLOSURES
For further specification of Moody's key rating assumptions and
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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
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
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