Hong Kong, May 13, 2016 -- Moody's Investors Service has confirmed the Aa3 issuer ratings of China
Shenhua Energy Company Limited (China Shenhua).
Moody's has also confirmed the A1 rating of the USD notes issued by China
Shenhua Overseas Capital Company Ltd. and irrevocably and unconditionally
guaranteed by Shenhua Hong Kong Limited (Shenhua HK, unrated),
a wholly owned subsidiary of China Shenhua.
The outlook on the ratings is negative.
This concludes the review for downgrade of China Shenhua's ratings
announced on 17 February, 2016.
RATINGS RATIONALE
The confirmation of China Shenhua's rating reflects:
a) China Shenhua's resilient credit profile amidst weak coal prices.
The resilience stems from its unique integrated business model,
which includes sizable power generation,coal logistics and transportation
businesses. The relatively stable profits from two of these businesses
moderate the negative impact from the decline in the profits of its coal
operations;
b) Relatively healthy leverage ratio,as measured by adjusted debt/EBITDA,
of around 1.6x at end-2015 and expectations of around 2.0x
for the next two years, but constrained by parent, China Shenhua
Group Corporation's (Shenhua Group, unrated) higher leverage
of around 3.7x in 2015;
c) Four notches of uplift -- resulting in the final Aa3 rating --
from our expectation of support from its parent and the Chinese government
(Aa3, negative). The government support would flow indirectly
via Shenhua Group.
The Group is of high importance to China's energy security due to:
1)its owning of a large amount of high quality coal reserves, 2)
its large scale of operation as a key supplier of coal, and 3) its
status as one of the largest power generation companies in terms of installed
capacity, accounting for around 5-6% of total installed
power generation capacity in China.
Additionally, Shenhua Group plays an important role in ensuring
the timely supply of coal to key power plants through its integrated transportation
and railway network. It also has been mandated by the government
to build and manage a number of national level coal strategic reserve
bases, which can counter supply shortages caused by natural disasters
or market turmoil.
"In our view, the credit profiles of China Shenhua and Shenhua
Group are closely linked as China Shenhua accounts for most of the group's
revenues, profits and assets. There are also frequent asset
transfers, as well as a high level of business integration and management
overlap," says Joe Morrison, a Moody's Vice President
and Senior Credit Officer, and also the International Lead Analyst
for China Shenhua.
"China Shenhua's standalone credit profile incorporates our
expectation that overcapacity in production will keep thermal coal prices
low for a prolonged period and the government is also likely to further
reduce power tariffs. Such developments will continue to pressure
the profits and credit metrics of China Shenhua and Shenhua Group,"
says Kai Hu, a Moody's Senior Vice President and also the Local
Market Analyst for China Shenhua.
Under our assumptions, China Shenhua's average coal price
and average power tariff will decrease by 10% and 6% respectively
in 2016 from 2015. We estimate that China Shenhua's adjusted
debt/EBITDA will slightly rise to around 2x over the next 12 months.
Shenhua Group has weaker credit metrics than China Shenhua due to a higher
debt burden at the holding company level and at other businesses outside
of China Shenhua. We estimate that Shenhua Group's adjusted
debt/EBITDA was around 3.7x at end-2015. The group's
weak credit profile constrains China Shenhua's standalone credit
strength in the current environment of low coal prices.
China Shenhua's liquidity position is strong. Its consolidated
cash on hand of around RMB42.3 billion at end-2015 and projected
cash flow from operations of RMB35-RMB40 billion in 2016 are sufficient
to cover: 1) its capex spending of around RMB20 billion; 2)
maturing short-term debt of RMB17.8 billion; and 3)
estimated dividend payments of around RMB10 billion in 2016.
The negative ratings outlook reflects pressures on the standalone credit
profiles of China Shenhua and Shenhua Group from industry overcapacity
and low coal prices. It also reflects the negative rating outlook
of the government and the potential for weaker-than-expected
support from it over time, given the reform process in China and
increasing evidence that both the central and local governments will gradually
expect state-owned enterprises to continue operating in commercial
areas without state support.
A return of the ratings outlook to stable could be considered if:
1) there is evidence of improvement in the coal market in China,
and in turn, a strengthening of the standalone credit profiles of
China Shenhua and Shenhua Group, and 2) the rating outlook for China
returns to stable, and we believe that government support for Shenhua
Group and indirectly for China Shenhua remains a priority and will not
likely change despite ongoing reform.
Specific credit metrics that we would consider for a stable outlook include:
1) adjusted debt/EBITDA below 1.5-2.0x for China
Shenhua and 3.5-4.0x for Shenhua Group.
A downgrade of China's sovereign rating will trigger a downgrade of China
Shenhua's rating.
The rating could also come under downward pressure if: (1) there
is a material deterioration in the company's performance, as a result
of further sharp falls in coal prices, or adverse changes to power-sector
regulations; and (2) the company demonstrates a more aggressive approach
in capital spending, such that its financial profile weakens beyond
expectation.
The credit metrics that we would consider for a downgrade include 1) adjusted
debt/EBITDA above 2.5x for China Shenhua and/or 4.5x for
Shenhua Group for a prolonged period.
China Shenhua's rating could also come under downward pressure if the
support from its parent weakens, and/or the parent's own credit
profile deteriorates materially.
The principal methodology used in these ratings was Global Mining Industry
published in August 2014. Please see the Ratings Methodologies
page on www.moodys.com for a copy of this methodology.
China Shenhua Energy Company Limited is 73% owned by Shenhua Group
Corporation Limited.
China Shenhua listed on the Hong Kong and Shanghai stock exchanges in
2005 and 2007. Its parent, Shenhua Group, is one of
the 53 key enterprises directly owned and administered by the State-owned
Assets Supervision and Administration Commission of the State Council.
Shenhua Group, 100% owned by the Chinese government,
was established by the State Council in 1995 to build a strategic energy
base for China.
The Local Market analyst for this rating is Kai Hu, +86 (21)
2057-4012.
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.
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.
Joe Morrison
VP - Senior Credit Officer
Corporate Finance Group
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
Gary Lau
MD - Corporate Finance
Corporate Finance Group
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 confirms Aa3 ratings of China Shenhua; outlook negative
