Panda Green Energy Group Ratings Lowered To #B+# On Execution Risk And Narrowed Financial Outlook Stable

Stocks and Financial Services Press Releases Tuesday September 19, 2017 16:00
HONG KONG--19 Sep--S&P Global Ratings

HONG KONG (S&P Global Ratings) Sept. 19, 2017--S&P Global Ratings todaylowered its long-term corporate credit rating on Hong Kong-listed renewableenergy operator Panda Green Energy Group Ltd. (PGE) to 'B+' from 'BB-'. At thesame time, we lowered the issue rating on the company's senior unsecured debtto 'B' from 'B+'. The outlook is stable.

The downgrade reflects our negative view on PGE's commitment to developgreenfield hydropower projects in Tibet. The projects go beyond the company'sexpertise in solar power operations, and could pose higher execution andfinancial risk. We believe these risks outweigh the potential benefit in termsof business opportunities and funding access from its largest shareholder, thecentral government-owned China Merchant Group (CMG). As a result, we havechanged our comparable rating assessment to neutral.

In May 2017, PGE announced the acquisition of China New Energy Holdings (CNE),which includes 5.2 gigawatts (GW) of hydropower development rights in Tibet,110 megawatts (MW) of solar capacity in operation or under construction, aswell as minority participation in 412MW of wind power projects. During thepast few months, PGE has reaffirmed its commitment to develop thesehydro-electricity generation projects, as demonstrated by the shareholders'approval, the completion of stock settlement for the acquisition on Aug. 11,2017, and by contracting government preferential loans related to theseprojects.

In our view, PGE's strategy shift from a pure solar operator could elevateexecution risks in the next three to five years, despite potential positiveeffects in the longer run from a larger asset base and better operationaldiversification. Hydropower assets are generally much larger in terms of scale

and complexity compared with that of solar, especially in Tibet, wheregeological conditions for the construction of hydropower plants and gridconnection are challenging. In addition, we believe PGE has limited experiencein constructing, operating, and maintaining such large-scale greenfieldprojects, which in aggregate represents more than triple its existinginstalled capacity of 1.4GW, as of end June 2017.

We view the utility as already highly leveraged even though PGE has a goodrecord of using equity financing for its acquisitions and can monetize thehydropower development rights if needed. Construction of the hydropower assetsalong with PGE's plan for continual expansion in solar power generation willlikely further depress credit metrics and leave little room for any unexpected

operational or event risks without jeopardizing its capital structuresustainability, as its debt-to-EBITDA ratio is above 10.0x. We forecast PGE'sfunds from operations (FFO) cash interest coverage at 1.4x-1.6x in 2017 and2018, hovering around the previous 1.5x downgrade trigger and materially lowerthan our previous forecast of above 2.0x.

Our view of PGE's business risk remains unchanged. We expect solar powergeneration to continue to dominate the company's EBITDA in the next three tofive years. We believe China's regulatory framework for renewable energy,although evolving, will continue to support reasonable project returns forsolar power producers, including PGE.

Nonetheless, a growing deficit in China's state-run renewable energy subsidyfund continues to cause payment delays on the feed-in-tariff (FIT) subsidies,pressurizing the cash flow of solar operators. As of end June 2017, PGE had atotal of Chinese renminbi (RMB) 1.65 billion in receivables, attributable totariff adjustment payments from the government. We foresee slight improvementin PGE's working capital management, with receivables accrued in the pastgradually being collected and its expansion pace in solar power projectsnormalizing. PGE currently has about 51% of capacity included in Batches 1-6of the government's subsidy catalog and another 12% eligible for inclusion inthe seventh batch catalog.

We believe the government's introduction of a green-certificate tradingprogram and open bidding for new solar projects allocation could put pressureon solar power operators' returns if they are implemented fully. However, thegovernment maintains a generally supportive stance for the renewable energyoperators by allowing options for participation in these alternative schemes,and PGE currently has limited exposure to such arrangements.

The stable outlook on PGE reflects our expectation that the company willcontinue to generate stable cash flow from its solar farms over the next 12months. The outlook also reflects our view that the Chinese regulatoryframework on solar renewable would remain supportive and that there will be no

materially adverse regulatory decisions, such as excessive reduction in FITfor new solar projects or pronounced delay in subsidy payments. Furthermore,we expect CMG would remain the largest shareholder of PGE and continue toprovide strategic, operational, financial, and business development support.

We could lower the rating on PGE if the company's credit metrics deterioratessignificantly such that its FFO cash interest coverage falls to 1.0x with noprospect for improvement. This could happen if the company engages in sizabledebt-funded acquisitions or capital expenditures, or if execution risk

associated with the Tibet hydropower projects results in material unexpecteddelays or cost overruns.

We could also lower the rating in case of any adverse regulatory decisions orpoor execution of the subsidy program that negatively affects PGE'sprofitability and cash flows. This could happen if the government furtherderegulates solar tariffs and opts for more project bidding, or if the delaysin subsidy payment persists or worsens.

We could also lower the rating if the company's association with CMG weakens.
We believe the likelihood of a positive rating action over the next 12 monthsis remote, given PGE's aggressive expansion program and the highly leveragedbalance sheet.

Nonetheless, we could raise the rating on PGE if the utility's credit metricsimprove materially, with the ratio of FFO to debt approaching 5.0% and FFOinterest coverage improving to about 2.0x on a sustained basis. This couldhappen if the company maintains a disciplined approach to capital expenditureand acquisitions, or if it changes its appetite on financial risk toleranceand starts deleveraging. Alternatively, an improvement to the solar poweroperating environment, such as increasing utilization hours and betterexecution on dispatch priority, could also increase FFO and boost creditmetrics for PGE.

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