China Southern Power Grid#s Proposed Guaranteed Senior Unsecured Notes Assigned #AA-# And #cnAAA# Ratings

Stocks and Financial Services Press Releases Tuesday April 18, 2017 17:12
HONG KONG--18 Apr--S&P Global Ratings

HONG KONG (S&P Global Ratings) April 18, 2017--S&P Global Ratings said today that it had assigned its 'AA-' long-term issue rating and 'cnAAA' long-term Greater China regional scale rating to the proposed U.S.-dollar-denominated senior unsecured notes that China Southern Power Grid Co. Ltd. (CSPG: AA-/Negative/--; cnAAA/--) will unconditionally and irrevocably guarantee. China Southern Power Grid International Finance (BVI) Co. Ltd. (CSPGIF) will issue the notes. CSPGIF is an indirect wholly-owned subsidiary of CSPG and was established for the purpose of debt issuance. The issue ratings are subject to our review of final issuance documentation.

The notes are subject to early redemption upon the occurrence of certain events. These events mainly include change of control, and failure to complete the registration of the guarantee with State Administration of Foreign Exchange within 120 business days after the issue date.

We expect CSPG to use the issuance proceeds mainly for refinancing its existing Hong Kong dollar (HK$) 7.9 billion loan at its Hong Kong subsidiary, China Southern Power Grid International (HK) Co. Ltd. The remaining amount (if any) will be used for general corporate purposes.

Equalization of the issue ratings with the ratings on CSPG reflects our view that the company's guarantee is unconditional and irrevocable and therefore qualifies for rating substitution treatment. The equalization also reflects our expectation that CSPG's geographical diversification and debt concentration could reduce structural subordination risk associated with the issuance. The notes will rank pari passu with all other senior unsecured debt of the issuer. The guarantee obligation will rank pari passu with all other senior unsecured debt of CSPG.

The rating on CSPG reflects the company's 'a' stand-alone credit profile and our opinion that there is an extremely high likelihood that the government of China will provide sufficient and timely extraordinary support to the company if needed.

The negative outlook on CSPG reflects our negative outlook on the sovereign credit rating on China. We expect CSPG, on a stand-alone basis, to sustain its stable credit profile over the next 24 months because allowed returns on effective assets for most provincial networks are comparable with historical returns. Recovering national power consumption will also support CSPG's cash flows and financial metrics. In our view, the ongoing reform on the regulations of China's power transmission and distribution sector could be credit positive to the company in the longer term by enhancing the stability and predictability of its cash flows and returns under a more transparent regime. CSPG's financial strength has improved steadily over the years. The company's ratio of funds from operation to debt strengthened to 32.5% in 2016, from 29.4% in 2015 and 26.8% in 2014, increasing the headroom over the downgrade trigger of 25%.

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