Fitch downgrades CLP’s default ratings on increasing debt-funded capex

The downgrade reflects a higher risk profile from CLP's growing non-regulated overseas assets, says Fitch analyst Sajal Kishore.

According to a release, Fitch Ratings has downgraded CLP Holdings Limited's (CLP) and CLP Power Hong Kong Limited's (CLP Power) Long-Term Foreign and Local currency Issuer Default Ratings (IDRs) to 'A' from 'A+'. The Outlook is Stable. Fitch has simultaneously affirmed CLP's and CLP Power's Short-Term Foreign Currency IDRs at 'F1'.

"The downgrade reflects a higher risk profile from CLP's growing non-regulated overseas assets and increasing debt-funded capex and acquisition of Australian energy assets," said Sajal Kishore, Director in Fitch's Energy & Utilities team. Assets outside of Hong Kong to total assets have increased to 44% currently, from 35% some two years ago.

While CLP benefits from increasing earnings diversification and contribution from the Australian energy assets, its overall business risk profile is higher reflecting the increased market risk exposure of the non-regulated assets. In addition, Fitch notes that the group faces increasing costs and challenges from environmental legislation, particularly in Hong Kong, China and Australia.

These challenges include the cost and availability of alternate fuel supplies on competitive terms. The agency notes that the group is making efforts in reducing exposure to emissions-intensive generation and that it also has a significant renewable generation capacity. However, emissions-intensive coal-fired generation remains a sizeable portion of total generation (59% as at end-2010).

CLP's rating also reflects the largely debt-funded nature of capex on greenfield generation projects and capex from environmental legislation. CLP's funds from operations (FFO) adjusted net leverage increased to 2.8x at end-2010 (FYE09: 2.6x) reflecting debt-funded generation capex, investment in its Hong Kong regulated business and overseas assets.

Fitch expects short-term credit metrics to remain under pressure from the HKD16bn debt-funded acquisition of Australian assets in March 2011. "The Stable Outlook following the downgrade reflects Fitch's expectation that CLP's forecast credit metrics will be maintained in line with the 'A' rating," added Mr. Kishore. CLP's funds from operations (FFO) adjusted net leverage is expected to stabilise in the range of 2.5x - 2.75x over the medium-term, benefitting from the integration of the Australian assets acquired in March 2011.

While positive rating action is considered unlikely over the medium-term, Fitch may upgrade if forecast FFO adjusted net leverage falls below 2.5x and forecast FFO gross interest cover rises above 8x, both on a sustained basis. Further negative rating action may be taken if forecast FFO adjusted net leverage increases above 3.5x and forecast FFO gross interest cover deteriorates to below 6.0x, both on a sustained basis, due to further material debt-funded acquisitions or significant investments in greenfield projects.

CLP's ratings continue to benefit from the credit strength of its principal wholly-owned subsidiary, CLP Power, which operates under a transparent regulatory environment and has an effective monopoly of power supply in Kowloon and the New Territories. Furthermore, the stable growth in electricity demand in Hong Kong and CLP Power's right under the Scheme of Control (SoC) business to fully pass on its actual fuel costs to customers underpin its stable cash flows. CLP Power contributes around 67% of total operating EBITDA of CLP. Given the strong linkages between CLP Power and CLP, the subsidiary's ratings are constrained by the ratings of its parent.

CLP's liquidity is soundly underpinned by its stable and recurring SoC cash flow, its even debt maturity profile, and its strong access to bank funding and capital markets. CLP had undrawn credit facilities of HKD34bn (on a consolidated basis) as at 31 December 2010.

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