Hong Kong, March 10, 2021 -- Moody's Investors Service has upgraded the issuer rating of State Grid
International Development Limited (SGID) to A1 from A2.
At the same time, Moody's has upgraded the senior unsecured rating
of State Grid Europe Development (2014) Plc, the issuing entity
of SGID's guaranteed EUR bond, to A1 from A2.
The rating outlook remains stable.
The upgrade reflects an increase in rating uplift to four notches from
three due to the continued strengthening in SGID's strategic importance
to its sole parent, State Grid Corporation of China (State Grid,
A1 stable).
"The continued strengthening in SGID's strategic importance
to its parent State Grid is demonstrated by the greater integration between
the two entities and robust track record of financial support from the
parent over time," says Ivy Poon, a Moody's Vice President
and Senior Analyst.
RATINGS RATIONALE
Moody's expects SGID's significance within State Grid's
business strategies to increase further due to its sizable overseas portfolio
and ongoing investments in Belt and Road countries.
The parent continues to demonstrate a robust track record of support by
providing financial injections to SGID. An average of around 70%
of the SGID's acquisition costs was funded by State Grid in the
past. Moody's expects similar commitment in SGID's
latest €2.57 billion acquisition of Compañía
General de Electricidad S.A (CGE).
Furthermore, State Grid recently highlighted its long-term
positioning as a leading energy company underpinned by an international
presence, thereby underpinning SGID's growing strategic importance.
The stronger financial linkage is also illustrated by SGID's rising
share in State Grid's total debt and net profit over the years.
Moreover, management integration between the two entities has strengthened
over time. SGID's management personnel from overseas units
have assumed key managerial positions in State Grid's provincial
grid companies upon transferring back to China in recent years,
and Moody's expects this trend to continue.
These factors have elevated SGID's strategic importance even higher
and, as a result, Moody's expects SGID to receive a
very high level of support from State Grid, resulting in a four-notch
uplift to A1 from SGID's standalone credit profile. The parental
support uplift also takes into consideration the high likelihood of support
from the Government of China (A1 stable) through State Grid, in
times of need.
Moody's expects SGID's standalone credit profile to remain
stable over the next two years. The standalone credit profile continues
to reflect the company's (1) prudent financial management underpinned
by financial and management support from the parent, (2) mediocre
asset quality with sizable exposure to non-investment grade assets,
and (3) moderate but stable financial profile amid active acquisitions.
The company's funds from operations (FFO)/debt will be steady at
14%-15% during 2020-2021, driven by
capital spending of HKD18 billion--HKD38 billion, with a peak
in 2021 due to the proposed acquisition of CGE.
In terms of environmental, social and governance (ESG) factors,
Moody's has considered that SGID has relatively low carbon transition
risk within the utility sector, since it mainly owns and operates
power grids. SGID's social risk assessment is based on the proven
operating track record of providing reliable power supply with no major
accidents. The key considerations of SGID's governance risk include
(1) its status as a state-owned enterprise; (2) its investment
strategy and financial policy; and (3) the transparency of the acquired
assets that are privately owned or not rated by rating agencies.
The rating outlook is stable, reflecting Moody's expectations
that (1) SGID's asset mix will not materially shift in the next 12-18
months; (2) SGID will maintain a financial profile that is within
Moody's base-case expectation; and (3) support from
State Grid will continue as and when needed.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Upward rating pressure is limited, given that SGID is already at
the same level as State Grid's and China sovereign rating.
Nevertheless, positive rating momentum for the standalone credit
profile could emerge over time if: (1) the credit quality of SGID's
underlying investments significantly improves to a level equivalent to
a Baa2 rating or higher on a sustained basis. Factors that we would
consider include investment-grade assets accounting for a significant
share of SGID's asset portfolio, or an upgrade of the ratings of
investees or countries/regions where the unrated investees are located;
(2) FFO interest coverage exceeds 4.5x and FFO/debt exceeds 18%
on a sustained basis.
SGID's issuer rating and standalone credit quality could come under downward
pressure if: (1) the credit quality of its underlying investments
substantially deteriorates to a level equivalent to a Ba2 rating or lower
on a sustained basis. Factors that Moody's would consider
include increasing exposure to non-investment-grade assets,
the downgrade of ratings of investees or countries/regions where the unrated
investees are located, or adverse changes in the regulatory environments
in which its investees operate; (2) FFO interest coverage falls below
2.0x and FFO/debt falls below 10% on a sustained basis.
Any evidence of weakening support from State Grid would also strain SGID's
ratings.
The principal methodology used in these ratings was Regulated Electric
and Gas Networks published in March 2017 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1059225.
Alternatively, please see the Rating Methodologies page on www.moodys.com
for a copy of this methodology.
State Grid International Development Limited is wholly owned by State
Grid and acts as the parent's sole overseas investment platform for the
transmission and distribution business. Its investments mainly
consist of regulated network assets across nine countries or regions,
with key operations in Brazil and Australia.
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 at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
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Ivy Poon
Vice President - Senior 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
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
88 Queensway
Hong Kong
China (Hong Kong S.A.R.)
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077
