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Rating Action:

Moody's assigns first-time Baa1 issuer rating to Sichuan Provincial Investment Group Co., Ltd.

 The document has been translated in other languages

31 Aug 2018

Hong Kong, August 31, 2018 -- Moody's Investors Service has assigned a first-time Baa1 issuer rating to Sichuan Provincial Investment Group Co., Ltd. (SCIG). At the same time, Moody's has assigned a Baa1 senior unsecured rating to the proposed bond to be issued by SCIG International Financial Limited, a wholly owned subsidiary of SCIG. The bond will be unconditionally and irrevocably guaranteed by SCIG. The ratings outlook is stable.

The proceeds from the proposed issuance will be used for project investment and for general corporate purposes.

RATINGS RATIONALE

SCIG's Baa1 issuer rating combines: (1) its ba1 baseline credit assessment (BCA); and (2) a three-notch uplift to reflect Moody's assessment of a high likelihood of extraordinary support from the Sichuan Provincial Government in times of need, under Moody's joint-default analysis (JDA) approach for government-related issuers.

"SCIG's Baa1 rating reflects its status as the largest energy platform for the Sichuan Provincial Government, and its important role in the local power generation sector, which is commercially viable but is linked to the public policy goals of the Sichuan Provincial Government," says Boris Kan, a Moody's Vice President and Senior Credit Officer.

SCIG holds 21% of the province's power generation assets, with a total installed capacity of about 20.8 gigawatts (mainly hydropower).

"The company's rating also reflects the high strategic importance of its Yalong River hydropower assets, with about 60% of the electricity generated by these assets transmitted to Jiangsu Province in 2017 under the West-East Power Transmission Plan", adds Kan.

"SCIG's ba1 BCA balances its low fuel cost risk, high cost competitiveness and stable dividend distribution against its lack of a majority interest in its Yalong River assets, its weakening credit metrics due to large capital spending, and its exposure to non-power and utilities operations and overseas expansion projects," says Kan.

Moody's assessment of a high likelihood of support from the Sichuan Provincial Government reflects SCIG's status as a 'commercial public sector' entity, given the company's key investments in the power generation sector.

Moody's support assessment also factors in the Sichuan Provincial Government's 100% ownership of SCIG and its strong ability to provide support, given that its credit quality — as an upper-tier regional and local government with national strategic importance — is closely connected to that of the sovereign.

The government's strong financial support is evidenced by a track record of capital injections and subsidies for debt servicing.

Due to the expected high capital spending and the long repayment period of new investments, Moody's expect SCIG's financial metrics to gradually weaken over the next three years. Specifically, Moody's project SCIG's pro rata consolidated funds from operations (FFO)/debt to decline to 7.6%-8.4% in 2018-20 from 8.8%-11.2% in 2016-17, and pro rata consolidated FFO interest coverage ratio to decline to 2.9x-3.0x in 2018-20 from 3.1x-3.2x in 2016-17.

The stable outlook primarily reflects Moody's expectation that over the next 12-18 months: (1) the company's credit metrics remain at levels appropriate for its ba1 BCA level; and (2) its key commercial public sector role and the Sichuan Provincial Government's ability to provide support will remain intact. The Sichuan Provincial Government's ability to provide support is mirrored in the stable outlook on the sovereign rating.

Moody's could upgrade SCIG's rating if its BCA improves, without any material change in the support assessment.

Moody's would raise SCIG's BCA if the company improves its financial profile by increasing its earnings and reducing debt. Credit metrics indicative of upward pressure on the BCA include adjusted funds from operations (FFO) interest coverage with pro rata consolidation of YHDC surpassing 3.5x, and/or adjusted FFO/debt with pro rata consolidation of YHDC surpassing 13% on a sustained basis.

Moody's could also upgrade the rating, without a corresponding improvement in the BCA, if there is an increase in SCIG's strategic importance to the Sichuan Provincial Government or a strengthening in the provincial government's ability to provide support, the latter of which would be illustrated by an upgrade of the sovereign rating.

SCIG's rating would be downgraded if its BCA weakens because of a material deterioration in its business or financial profile, without any material change in the support assessment. The BCA could be lowered if: (1) SCIG takes on more aggressive debt-funded capital expenditure; and/or (2) there are adverse changes in China's regulatory environment.

Credit metrics indicative of downward pressure on SCIG's BCA include adjusted FFO/debt with pro rata consolidation of YHDC below 5%, and/or adjusted FFO/interest coverage with pro rata consolidation of YHDC below 2.5x over a prolonged period.

A downgrade of China's sovereign rating (A1 stable) to A2 and/or deterioration in the Sichuan Provincial Government's credit quality would not have an immediate impact on the company's rating, because its rating is resilient to such developments. However, Moody's could downgrade the rating, without a corresponding improvement in the BCA, if there is a reduction in SCIG's strategic importance to the Sichuan Provincial Government.

The methodologies used in these ratings were Regulated Electric and Gas Utilities published in June 2017, and Government-Related Issuers published in June 2018. Please see the Rating Methodologies page on www.moodys.com for a copy of these methodologies.

Established in 1988, Sichuan Provincial Investment Group Co., Ltd.'s (SCIG) is the largest state-owned energy platform under the Sichuan Provincial Government. As of December 2017, SCIG held interests in various power generation assets with a total installed capacity of about 20.8 gigawatts (mainly hydropower), amounting to 21% of the province's total.

SCIG's major asset is its 48% equity stake in Yalong River Hydropower Dev Company, Ltd. (YHDC), which owns all hydropower assets along the Yalong River. In 2017, YHDC contributed 84% of SCIG's adjusted FFO.

In addition to power generation, SCIG also engages in water & gas utilities, iron alloy production and financial investments, which accounted for 4%, 2% and 1% of the company's gross profits in 2017, respectively. The company also began its healthcare services operations earlier this year.

The company is wholly owned by the Sichuan State-owned Assets Supervision and Administration Commission (SASAC).

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 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.

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 entities are participating and the rated entities or their agent(s) generally provide 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.

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.

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: 852 3758 1350
Client Service: 852 3551 3077

Vivian Tsang
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.
© 2023 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

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