Hong Kong, May 27, 2022 -- Moody's Investors Service has downgraded to Baa2 from Baa1 the issuer ratings of Shanghai Electric Holdings Group Co., Ltd. (SEGC) and the company's key subsidiary, Shanghai Electric Group Company Limited (SHE). In addition, Moody's has downgraded SEGC's Baseline Credit Assessment (BCA) to ba2 from ba1.
Moody's has also downgraded to Baa2 from Baa1 the ratings of the senior unsecured bond issued by Shanghai Electric Group Global Investment Ltd and guaranteed by SEGC.
Moody's has also placed all issuer and senior unsecured ratings on review for further downgrade.
Moody's has changed the outlook to ratings under review from negative.
"The downgrade of SEGC reflects the company's very high leverage due to a substantial contraction in EBITDA and high debt balance," says Gerwin Ho, a Moody's Vice President and Senior Credit Officer.
The rating downgrade of SHE reflects the close linkage of its credit profile with that of SEGC.
Both ratings are on review for further downgrade, reflecting Moody's concern that execution and market challenges amid industry headwinds will constrain SEGC's ability to deleverage meaningfully to support its current rating level over the next two years.
RATINGS RATIONALE
SEGC's Baa2 issuer rating incorporates: 1) its BCA of ba2, which has been downgraded from ba1 due to its elevated leverage, and 2) Moody's assessment of the company's high likelihood of support from, and a high level of dependence on, the Shanghai Government and ultimately the Government of China (A1 stable) in times of need, which results in a three-notch uplift to SEGC's rating.
SEGC's BCA of ba2 reflects (1) its market leadership in the manufacturing of energy and industrial equipment, (2) diversified product portfolio that mitigates cyclicality in each individual segment, and (3) adequate liquidity and considerable assets for monetization.
However, the company's BCA is constrained by (1) high legacy debt driven by previous acquisitions and investments; (2) weak EBITDA amid industry headwinds; and (3) the increasing execution risks stemming from new businesses and expansion into overseas markets.
SEGC's leverage - as measured by adjusted debt/EBITDA - was very high at 11.7x in 2021, up from 8.9x in 2020, due to a large decline in EBITDA and a high balance of debt built up from previous acquisitions.
SEGC's EBITDA fell 23% in 2021, following a 21% drop in 2020. The decline is greater than the rating agency previously expected, primarily driven by the cost overrun issues for overseas construction amid the pandemic, input cost hikes, and logistics constraints for imported components.
Moody's expects SEGC's EBITDA growth to remain constrained over the next two years due to 1) the government's export ban of coal-fired power equipment in September 2021, 2) expiry of subsidized tariffs for wind power projects by the end of 2021, 3) a slowdown in property investment, 4) input cost hikes, and 5) the latest disruptions to its operations due to pandemic-related lockdowns in some cities.
While SEGC has plans to lower debt via asset sales and more disciplined capital spending, Moody's expects its asset disposals to face market and execution uncertainties amid industry headwinds and slowing economic growth.
As a result, Moody's estimates SEGC's leverage – as measured by adjusted debt/EBITDA – to remain elevated at over 11x in 2022 and 2023, absent material asset sales.
In addition, the company recorded a substantial one-off write-off in receivables related to an uncollectable receivable incident in the first half of 2021, several associates and a transaction with China Evergrande Group (Ca negative) in 2021. These have further impaired its balance sheet strength and will constrain SEGC's cash flow.
Moody's high support assessment is underpinned by (1) SEGC's 100% ownership by and close operational linkage to the Shanghai Government; (2) SEGC's high strategic importance to China as one of the top-three power equipment manufacturers and among only a few nuclear power equipment manufacturers in the country; (3) high reputational risk for the Shanghai government and ultimately the Chinese government if SEGC defaults, due to its status as one of the major state-owned entities (SOEs) in Shanghai; and (4) its history of receiving support from the Shanghai government.
This support assessment is also based on the Chinese government's strong ability to provide such support, as well as the Shanghai government's status as one of the upper-tier regional and local governments (RLGs) with national strategic importance.
The high dependence level reflects the fact that SEGC and the Chinese government are exposed to common political and economic event risks.
SHE's Baa2 issuer rating primarily incorporates its standalone credit strength and a three-notch parental uplift, reflecting Moody's assessment that the company will receive high support from the Shanghai government in times of need, through the company's parent, SEGC.
SHE is the largest subsidiary of SEGC and accounted for 80%, 96% and 79% of SEGC's revenues, EBITDA and total assets, respectively, in 2021. As a result, Moody's considers the credit profile of SHE to be closely linked to that of SEGC.
Both SEGC and SHE have adequate liquidity. The companies' cash and cash equivalents along with Moody's projected operating cash flow should fully cover their short-term debt over the next 18 months.
They also have good access to bank credit due to their state-owned background under the Shanghai government.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Moody's review will focus on assessing (1) SEGC's execution of its deleveraging plans via asset sales; and (2) the companies' business and financial performance amid industry headwinds.
Moody's could confirm the ratings if SEGC successfully executes its deleveraging plans via asset sales or meaningfully improves its business and financial performance such that the company's adjusted debt/EBITDA falls below 9.0x.
On the other hand, Moody's could downgrade SEGC's ratings if the company is not able to deleverage meaningfully and its leverage remains above 9.0x for a prolonged time.
Any evidence of weakening government support to SEGC could also pressure the ratings.
Moody's could confirm SHE's ratings if Moody's confirms SEGC's ratings.
Likewise, SHE's ratings could be downgraded if Moody's downgrades SEGC's rating. In addition, a weakening of support to SHE from SEGC could also pressure the former's ratings.
The principal methodologies used in rating Shanghai Electric Holdings Group Co., Ltd. and Shanghai Electric Group Global Investment Ltd were Manufacturing published in September 2021 and available at https://ratings.moodys.com/api/rmc-documents/74970, and Government-Related Issuers Methodology published in February 2020 and available at https://ratings.moodys.com/api/rmc-documents/64864. The principal methodology used in rating Shanghai Electric Group Company Limited was Manufacturing published in September 2021 and available at https://ratings.moodys.com/api/rmc-documents/74970. Alternatively, please see the Rating Methodologies page on https://ratings.moodys.com for a copy of these methodologies.
Shanghai Electric Holdings Group Co., Ltd. (SEGC) is a comprehensive equipment manufacturer of energy and industrial equipment and provides integrated services. The company is one of three major power equipment suppliers in China.
Shanghai Electric Group Company Limited is a flagship listed subsidiary of SEGC. It is 54.38% owned by SEGC as of the end of 2021. SEGC is fully owned by the State-owned Assets Supervision and Administration Commission, under the Shanghai Government.
The local market analyst for these ratings is Sue Su, +86 (10) 6319-6505.
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 on https://ratings.moodys.com/rating-definitions.
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 issuer/deal page for the respective issuer on https://ratings.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 ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.
These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website https://ratings.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 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 https://ratings.moodys.com for the Regulatory Disclosures for each credit rating action, shown on the issuer/deal page, and for Moody's Policy for Designating Non-Participating Rated Entities, shown on https://ratings.moodys.com.
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://ratings.moodys.com/documents/PBC_1288235.
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 https://ratings.moodys.com.
The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on https://ratings.moodys.com.
Please see https://ratings.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 issuer/deal page on https://ratings.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.
Gerwin Ho
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
Client Service: 852 3551 3077
Gary Lau
MD - Corporate Finance
Corporate Finance Group
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
