March 30, 2017 / 10:15 AM / 4 months ago

Fitch Rates CK Hutchison Holdings' Proposed Notes 'A-(EXP)'

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(The following statement was released by the rating agency) SINGAPORE/HONG KONG, March 30 (Fitch) Fitch Ratings - Singapore/Hong Kong - 30 March 2017: Fitch Ratings has assigned expected ratings of 'A- (EXP)' to CK Hutchison International (17) Limited's proposed US dollar-denominated guaranteed notes. The proposed senior unsecured notes will be unconditionally and irrevocably guaranteed by CK Hutchison Holdings Limited (CKHH, A-/Stable) and rank pari passu with other senior unsecured borrowings of CKHH. The notes will be issued primarily for refinancing purposes: CKHH has HKD72 billion of debt falling due in 2017, a large portion of which are capital market debt instruments. The final ratings on the notes are contingent upon the receipt of documents conforming to information already received. KEY RATING DRIVERS Results in Line with Expectations: CKHH's financial and operating results for the year ended 31 December 2016 are broadly in line with Fitch's expectations, despite being affected by FX movements against its reporting currency of the Hong Kong dollar. Reported EBITDA, stripping out currency effects, increased by 6%, with solid contributions from all businesses. Ports registered lower throughput of 3% from weaker trading volumes and competition, but EBITDA margins were stable, supported by cost-efficiency measures. Retail continued to perform well, with earnings supported by organic growth in Asia (despite a fall in same-store sales) and in Europe. Reported EBITDA benefitted from the performance of CKHH's infrastructure investments, led by its subsidiary Cheung Kong Infrastructure Holdings Limited (CKI, A-/Stable), although this was partly offset by weakness in the energy segment, Husky Energy, due to low oil prices. Diversified Business, Stable Cash Flow: CKHH's ratings reflect its strong business profile and geographical diversification, and stable cash flow generation from its high-quality ports, retail, infrastructure, energy, and telecommunications businesses. No single business division accounts for more than 40% of EBITDA. The infrastructure and ports businesses provide visible, recurring cash flows. Capital-Intensive Business: CKHH's ports, infrastructure and telecommunications businesses are capital intensive and push up leverage, which constrains the overall ratings. There is also an element of structural subordination of cash flows, especially in the utilities/infrastructure assets, given the level of debt at the asset-owning level and that the operating cash flows of these businesses can only be accessed via dividends. European Telecoms' Positive FCF: We expect CKHH's European telecoms operations to remain FCF-positive in the medium term. 3 Group Europe has posted positive FCF (EBITDA after capex and licence fees) since 2014 after a number of years of cash drain. We expect the negative FCF position at 3 Italy to reverse, as it realises significant synergies from the recently closed merger (via a 50/50 JV, Wind Tre) between 3 Italy and Vimpelcom's Italian operations, Wind Telecomunicazioni SpA (Wind, B+/Stable). The combined entity is one of the largest mobile operators in Italy by mobile subscribers, with a market share of just over a third (from 3 Italy's 12% market share, pre-merger), improving its competitiveness and profitability in a highly competitive market. Stable Financial Profile: We expect FFO-adjusted net leverage to remain below 4.0x in 2017-2019 (2016: 3.6x), barring significant debt-funded acquisitions or a rise in dividend pay-out ratio. Reported financial performance is exposed to currency-volatility effects, as seen in 2015 and 2016. CKHH mitigates such risks by broadly matching the denomination of debt with the currency of underlying assets. Zero dividends from Husky Energy have been factored into our forecasts in 2017-2018, given cash-flow management initiatives in a low oil and gas price environment. Strong Liquidity, Access to Funding: CKHH's ratings are also supported by its robust liquidity profile and ease of access to capital. Fitch-adjusted cash and cash equivalents, which exclude reported other liquid assets of HKD6 billion, were HKD156 billion at 2016, and debt maturities are well-laddered. CKHH has strong access to capital markets for its capital needs. KEY ASSUMPTIONS - Moderate Fitch-adjusted revenue growth in 2017-2018 - Fitch-adjusted EBITDA margins of over 20% in 2017-2018 (2016: 24%) - No dividends from Husky Energy in 2017-2018 - Dividend pay-out ratio of 30%-40% in 2017-2018 - No major acquisitions or disposals. RATING SENSITIVITIES Negative: Developments that may, individually or collectively, lead to negative rating action include: - FFO-adjusted net leverage exceeding 4.0x on a sustained basis; - Substantially negative FCF after acquisitions and disposals; - Significant change in business mix and capital structure management that are adverse to its credit risk profile; - A weakening in quality, or decreased quantity of recurring cash flows No positive rating action is expected in the near term due to CKHH's business profile. Contact: Primary Analyst Isabelle Katsumata Senior Director +65 6796 7226 Fitch Ratings Singapore Pte Ltd One Raffles Quay South Tower #22-11 Singapore 048583 Secondary Analyst Renee Lam Director +852 2263 9971 Committee Chairperson Buddhika Piyasena Senior Director +65 6796 7223 Date of Relevant Rating Committee: 11 July 2016 Fitch adjustments include Fitch-adjusted EBITDA, which is reported EBITDA, less EBITDA contribution from associates and JV's, plus dividends from associates and JVs. Media Relations: Leslie Tan, Singapore, Tel: +65 67 96 7234, Email: leslie.tan@fitchratings.com; Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: wailun.wan@fitchratings.com. 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