China Longyuan Power Group Corp. Ltd. Assigned 'BBB+' And 'cnA+' Ratings; Outlook Stable

Stocks and Financial Services Press Releases Thursday November 29, 2012 13:51
HONG KONG--29 Nov--Standard & Poor's
  • We view Longyuan's business risk profile as "satisfactory" and its financial risk profile as "significant."
  • We see a "very high" likelihood of extraordinary government support in the event of financial distress for the China-based wind power operator.
  • We are assigning our 'BBB+' long-term corporate credit rating and 'cnA+' long-term Greater China regional scale rating to Longyuan.
  • The stable outlook reflects our expectation that Longyuan's strong market position and China's supportive regulatory landscape will continue for the next couple of years.

HONG KONG (Standard & Poor's) Nov. 29, 2012--Standard & Poor's Ratings Services today assigned its 'BBB+' long-term corporate credit rating to China-based wind power generator China Longyuan Power Group Corp. The outlook is stable. At the same time, Standard & Poor's assigned its 'cnA+' long-term Greater China regional scale rating to Longyuan.

"The rating on Longyuan reflects our assessment of the company's stand-alone credit profile and likelihood of government support for the company," said Standard & Poor's credit analyst Johnson Ng.

We assess Longyuan's stand-alone credit profile as 'bb'. We believe that there is a "very high" likelihood that the government of China (AA-/Stable/A-1+; cnAAA/cnA-1+) will provide sufficient and timely extraordinary support to the company through its wholly-owned parent, China Guodian Corp. (not rated), in the event of financial distress.

In accordance with our criteria for government-related entities, our view of the extraordinary government support is based on our assessment of the following Longyuan characteristics:
  • Its "very important" role as China's major wind power generator and a crucial player in meeting the government's policies for renewable energy and reducing carbon emissions by 45%; and
  • Its "very strong" link with the government through its parent, Guodian, which the Chinese government fully owns.

The aggressive financial risk profile of Guodian constrains the rating on Longyuan. We see strong linkages between the two entities: (1) we view Longyuan as a core subsidiary of Guodian as its renewable energy platform; (2) Guodian controls Longyuan's management, although the parent's board representatives cannot vote on related-party matters; (3) the parent provides shareholder loans to Longyuan at very favorable terms; and (4) Guodian guarantees some of Longyuan's debts.

In our view, Longyuan's business risk profile is "satisfactory." Curtailment (or the non-dispatch of power at request of grid operators) over recent years is a key rating constraint. Curtailment affects 14%-15% of the company's total utilization. Nevertheless, we believe grid curtailment issues will improve over the next couple of years because of the government's announced policies to address the problem.

"Longyuan's longer track record in operating wind power stations than other peers in China underpins its business risk profile," said Mr. Ng. "The company also has a superior-quality asset portfolio to its peers, a strong market position, and favorable regulatory framework supportive of its growth plans."

We assess Longyuan as having a "significant" financial risk profile, stemming from its increasing balance sheet leverage to fund its capital spending. However, in our base case, we believe the company's debt to total capital ratio will remain at about 65% over the next couple of years, a level that is slightly higher than the average for the peers that we rate. We also expect capacity additions over the next couple of years to enhance Longyuan's cash flow adequacy.

The stable outlook reflects our expectation that Longyuan's strong market position and supportive regulatory landscape will be maintained for the next couple of years. It also reflects our expectation that the company will continue to generate steady operating cash flows from its portfolio of wind farm assets. We expect the company to maintain good access to external funding sources to support its significant capital expenditure plans as well as to refinance its maturing debt obligations.

We could raise the rating on Longyuan if its parent Guodian's credit profile improves, and if Longyuan can execute its projects in a timely manner and within budgeted costs.

We could lower the rating on Longyuan if: (1) greater execution risk arises from the implementation of its capital expenditure, including significant cost over-runs or delays in project completion; (2) the company aggressively increases its debt-funded investments, which could weaken the financial metrics beyond our base case expectations; (3) Guodian's creditworthiness deteriorates; or (4) the likelihood reduces that Longyuan will receive extraordinary government support.


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