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Fitch Affirms CKI at 'A-', Outlook Stable
April 26, 2017 / 3:21 AM / 8 months ago

Fitch Affirms CKI at 'A-', Outlook Stable

(The following statement was released by the rating agency) SINGAPORE/HONG KONG, April 25 (Fitch) Fitch Ratings has affirmed Cheung Kong Infrastructure Holdings Limited's (CKI) Long-Term Foreign-Currency Issuer Default Rating (IDR) and senior unsecured rating at 'A-'. The Outlook is Stable. CKI's rating reflects its standalone credit profile of 'BBB+' and a one-notch uplift on account of its linkages with its largest shareholder, CK Hutchison Holdings Limited (CKHH, A-/Stable). KEY RATING DRIVERS Stable Income Drives Ratings: CKI's ratings are underpinned by stable and predictable income from a diversified portfolio of regulated utilities and infrastructure investments. Most cash inflow comes from its regulated gas and electricity network and water assets: Power Asset Holdings (PAH) in Hong Kong; UK Power Network Holdings Ltd, Northumbrian Water Group, Northern Gas Networks Ltd and Wales & West Gas Networks Ltd in the UK; and SA Power Networks, Powercor, Citipower and Australian Gas Networks in Australia. Structural Subordination Risk: FFO is derived largely from upstream dividends and interest received on shareholder loans. However, CKI invests with partners - typically PAH in which it has a 38.9% stake, or other affiliates in the Cheung Kong group, including its parent CKHH - which effectively gives it majority control over its investments. Solid Portfolio Credit Quality: We view the quality of the aggregated portfolio of CKI's dividend receipts in the high 'BBB' category. Notwithstanding structural subordination issues, the diversification of CKI's investments and its strong management team support CKI's 'BBB+' standalone rating. Linkages with CKHH: CKI's Long-Term IDR incorporates a one-notch uplift on account of operating and strategic linkages with its parent, CKHH, which holds 75.67% of CKI. CKI is a key part of CKHH's infrastructure business. Prudent Approach to Acquisitions: CKI's approach to acquisitions is to ensure an adequate and immediate return. Acquisitions have typically been in the regulated utilities sector in countries with supportive regulatory frameworks, but the company has also invested in non-utility infrastructure segments characterised by high barriers to entry and stable cash flows. CKI also has a record of frequent equity issuance to maintain a sound capital structure. Duet Acquisition Easily Accommodated: CKI announced on 16 January 2017 its plan to acquire - through the formation of a JV between CKI, PAH and Cheung Kong Property Holdings Limited (CKP, A-/Positive) - 100% of ASX-listed Duet Group (Duet) for an equity value of AUD7.4 billion (HKD42.4 billion). CKI will take 40%, CKP 40% and PAH 20% in the JV. Duet primarily owns and operates gas and electricity distribution assets and gas transmission assets in Australia, as well as a 900 megawatt (MW) portfolio of low-CO2-emitting generation assets in Australia, the US and Europe. CKI's share of the acquisition would amount to around AUD2.96 billion (around HKD16.96 billion), which we believe CKI would fund with a mix of debt and available cash on hand, including the HKD4.1 billion in special dividend it received from PAH in February 2017. The acquisition is consistent with CKI's strategy of investing in regulated utilities that provide stable and predictable returns and operate in jurisdictions with mature and transparent regulatory frameworks. Duet's primary businesses include Multinet Gas, a wholly regulated gas distribution network company in Victoria, Australia; a 66% stake in United Energy, a wholly regulated electricity distribution network company, also in Victoria; and the Dampier Banbury Pipeline, which is the main gas transmission pipeline in Western Australia. We expect the transaction to close by May 2017, and the acquired assets to yield stable dividends to CKI. DERIVATION SUMMARY CKI's Long-Term IDR incorporates a one-notch uplift on account of linkages with its parent, CK Hutchison Holdings Limited (CKHH, A-/Stable) which holds 75.67% of CKI. CKI is a key part of CKHH's infrastructure business. CKI's standalone rating is supported by a stable and predictable income stream from a diversified portfolio of investments primarily in regulated utilities but also in infrastructure assets. We view the aggregated portfolio of CKI dividend receipts in the high 'BBB' category, taking account factors such as structural subordination issues and a strong CKI management team. KEY ASSUMPTIONS - Moderate increase in cash-inflow from associates/joint ventures and investments in 2017-2019 - Dividend growth-rate increasing consistent with historical levels - Acquisition of Duet completes in May 2017; CKI's share of the acquisition is HKD16.96 billion RATING SENSITIVITIES Positive: Future developments that may collectively or individually lead to positive rating actions include: - An upgrade of CKI's ratings would be contingent on the rating of its parent CKHH being upgraded (which is unlikely in the near-term due to CKHH's business and financial profile) together with CKI's standalone rating profile improving to levels consistent with an 'A-'. For CKI's standalone ratings: - Fitch-adjusted FFO interest cover of above 5.5x on a sustained basis (7.6x end-2016); and - Significantly stronger cash-inflow quality; and - Positive Fitch-adjusted FCF on a sustained basis Negative: Future developments that may collectively or individually lead to negative rating actions include: - Weakening strategic or operational ties between CKI and its parent - A downgrade of CKHH's rating For CKI's standalone rating: - Fitch-adjusted FFO interest cover below 4.5x on a sustained basis - Weaker quality cash-inflow from investments due to significant acquisitions in the non-regulated sector that undermine the quality of cash flows to CKI - Negative Fitch-adjusted FCF on a sustained basis LIQUIDITY CKI had cash and cash equivalents of HKD11.8 billion in 2016 (2015: HKD7.9 billion) against HKD9.9 billion of short-term maturities (2015: HKD zero billion) and total debt of HKD26.4 billion (2015: HKD25.1 billion), which includes HKD9.5 billion of perpetual securities, for which Fitch does not give any equity credit. CKI has an internal policy not to maintain any undrawn committed credit lines. Debt maturities are generally well laddered. The company has strong and proven access to the bank and debt capital markets. FULL LIST OF RATING ACTIONS Company Contact: Isabelle Katsumata Primary Analyst Senior Director +65 6796 7226 Fitch Ratings Singapore Pte Ltd. One Raffles Quay South Tower #22-11 Singapore 048583 Edwin Lam Secondary Analyst +85 2 2263 9975 Committee Chairperson Buddhika Piyasena Senior Director +65 6796 7223 For regulatory purposes in various jurisdictions, the supervisory analyst named above is deemed to be the primary analyst for this issuer; the principal analyst is deemed to be the secondary Media Relations: Leslie Tan, Singapore, Tel: +65 67 96 7234, Email:; Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: Additional information is available on Applicable Criteria Criteria for Rating Non-Financial Corporates (pub. 10 Mar 2017) here Parent and Subsidiary Rating Linkage (pub. 31 Aug 2016) here Treatment and Notching of Hybrids in Non-Financial Corporate and REIT Credit Analysis (pub. 29 Feb 2016) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here Solicitation Status here#solicitation Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. 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