September 26, 2017 / 2:18 AM / a year ago

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

(The following statement was released by the rating agency) SINGAPORE/HONG KONG, September 25 (Fitch) Fitch Ratings has assigned expected ratings of 'A-(EXP)' to CK Hutchison International (17) (II) 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. CK Hutchison International (17) (II) is a wholly owned subsidiary of CKHH. The notes will be issued primarily for refinancing purposes: CKHH had HKD40 billion of debt maturing within 12 months as of June 30, 2017, of which a considerable portion 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 Diversified Business, Stable Cash Flow: CKHH's ratings reflect its strong business profile, 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 and infrastructure assets, as the debt at the asset-owning level and the operating cash flows of these businesses can only be accessed via dividends. European Telecoms' Positive FCF: We expect CKHH's European telecom operations to maintain positive free cash flow (FCF) 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 a reversal in 3 Italia's negative FCF position, as it realises significant synergies from the 2016 merger between 3 Italia and VEON Ltd.'s (formerly VimpelCom Ltd, BB+/Stable) Italian operations, Wind Telecomunicazioni SpA. The 50/50 venture, Wind Tre SpA (B+/Stable), is one of Italy's largest mobile operators by subscribers, with a market share of over 35%, up from 3 Italia's 12% share pre-merger. We expect 3 Group Europe, with revenue and EBITDA growth of 10% and 33% respectively during 1H17, to achieve robust results for 2017. Results in Line with Expectations: CKHH's financial and operating results for 1H17 were broadly in line with expectations, despite being affected by foreign-exchange movements against its reporting Hong Kong dollar currency. Reported EBITDA, stripping out currency effects, increased by 7% in 1H17, with solid contribution from all businesses. Ports registered throughput growth of 3%, while revenue was flat from 1H16, and EBITDA margins were stable, supported by cost-efficiency measures. Retail continued to perform steadily, with earnings supported by organic growth. Europe and Asia saw same-store sales growth of 3%, balancing the 6% decline in China where EBITDA margins remained robust at 21%. Reported EBITDA from CKHH's infrastructure investments, led by its subsidiary, CK Infrastructure Holdings Limited (CKI, A-/Stable), registered a mild decline in 1H17 due to currency effects - on a local currency basis, reported EBITDA increased by 2%. We expect CKHH to benefit from stable dividends from its infrastructure investments as regulatory periods are fixed for at least four to five years (and even longer in the UK). Stable Financial Profile: We expect FFO adjusted net leverage to remain at or below 4.0x in 2017-2018, barring significant debt-funded acquisitions or a rise in the dividend payout ratio. While reported financial performance is exposed to currency-volatility effects, CKHH mitigates such risks by broadly matching denomination of debt with the currency of underlying assets. Zero dividends from Husky Energy have been factored into our 2017-2018 forecasts, 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. Reported cash and cash equivalents, excluding other liquid assets, were HKD150 billion at 1H17 (1H16: HKD154 billion), and debt maturities are also well-laddered. The company has strong access to capital markets. DERIVATION SUMMARY CKHH's ratings are supported by its diversified business - by geography and segment - providing it with stable cash flows and supporting its strong business profile. There are few peers with similar business models as CKHH is a conglomerate with infrastructure, ports, retail and telecoms segments. However, CKHH is somewhat comparable to CLP Holdings Limited (CLPH, A/Stable) although CLPH - an integrated and largely regulated utility (through its key Hong Kong business CLP Power Hong Kong Limited (A/Stable)) - has a stronger business profile, and historically a more robust financial profile. KEY ASSUMPTIONS Fitch's key assumptions within the rating case for CKHH include: - Moderate Fitch-adjusted revenue growth in 2017-2018 - Fitch-adjusted EBITDA margins of 20%-25% in 2017-2018 (2016: 24%) - No dividends from Husky Energy or Wind Tre in 2017-2018 - Dividend payout ratio of around 30% in 2017-2018 - Acquisitions in 2017 include investment in Duet (via CKI), CKP (Canada) Holdings (via CKI), ista Luxemburg GmbH (via CKI) and acquisition of UK Broadband. No major acquisitions or disposals in 2018. 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 free cash flow after acquisitions and disposals; - Significant changes in business mix and capital structure management adverse to its credit risk profile; - A weakening quality or decreased quantity of recurring cash flows. Positive: Developments that may, individually or collectively, lead to positive rating action include: Provided the business profile of CKHH remains unchanged, - FFO adjusted net leverage of 3.0x or less on a sustained basis; and - Positive free cash flow after acquisitions and dividends on a sustained basis. Contact: Primary Analyst Isabelle Katsumata Senior Director +65 6796 726 Fitch Ratings Singapore Pte Ltd One Raffles Quay South Tower #22-11 Singapore 048583 Secondary Analyst Renee Lam Director +852 2263 9971 Committee Chairperson Jeong Min Pak Senior Director +822 3278 8360 Date of Relevant Rating Committee: 7 July 2017 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. 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