(The following statement was released by the rating agency)
March 14 -
-- ENN, as part of a consortium, made a cash offer to acquire China Gas in December 2011.
-- Uncertainties remain over the outcome of this offer and the credit implication on ENN.
-- We are keeping the ‘BBB-’ corporate credit rating, ‘cnA-’ Greater China scale credit rating, and the ‘BBB-’ issue rating on all outstanding senior notes of ENN on CreditWatch with negative implications.
On March 14, 2012, Standard & Poor’s Ratings Services kept the ‘BBB-’ long-term corporate credit rating and ‘cnA-’ Greater China scale credit rating on ENN Energy Holdings Ltd. on CreditWatch with negative implications. We also maintained the CreditWatch status for the ‘BBB-’ issue ratings on the company’s outstanding senior unsecured notes. We initially placed all the ratings on CreditWatch with negative implications on Dec. 13, 2011.
The CreditWatch status reflects the uncertainties associated with the proposed joint cash offer by ENN and China Petroleum & Chemical Corp. (Sinopec Corp.; foreign currency A+/Stable/--; cnAAA) to acquire China Gas Holdings Ltd. (not rated) announced on Dec. 13, 2011.
We placed the ratings on CreditWatch with negative implication because ENN’s financial risk profile could weaken following the company’s offer. In our view, the extent of the negative rating impact on ENN is subject to the size of financial obligation and the financing arrangement of ENN in this offer. The financial obligation of ENN could vary significantly, depending on how many shares of China Gas the consortium can acquire, the offer price, and the stake of ENN in the consortium, which is 55% (excluding Sinopec Corp.’s existing stake in China Gas) according to the announcement in December.
We believe uncertainties on the final outcome of the proposed acquisition remain. The required approvals from the Chinese regulators for this acquisition are still pending. Some major shareholders of China Gas have been buying more shares in the market in the past few months, which could add to the challenges to proceed with the offer under its original terms. It is uncertain if the consortium would amend any terms in the offer.
We estimate ENN’s credit metrics to remain largely consistent with the ‘BBB-’ rating due to the organic growth of its business and the minimal impact of this offer on the financials of 2011. By end-2011, ENN’s ratio of funds from operations (FFO) to debt is likely to have been above 20% and its total debt-to-total capital ratio above 50% as a result of the issuance of US$750 million in bonds in May 2011. In our view, ENN’s liquidity remains “adequate,” as defined in our criteria.
We aim to resolve the CreditWatch when we have more clarity on the outcome of the offer and ENN’s financing arrangement. We will decide on the appropriate financial adjustments, including the consolidation approach to ENN and China Gas, if the acquisition proceeds. If we do not have more clarity in 90 days, we will keep the rating on CreditWatch.
We could lower the rating if we believe: (1) ENN’s business profile will deteriorate materially; or (2) the company’s financial performance will significantly weaken, such that its expected adjusted FFO-to-debt ratio in 2012 will be well below our expectation of 20%. We could also lower the rating if the company’s liquidity weakens to “less than adequate,” as defined in our criteria.
We could affirm the rating with a stable outlook if: (1) the proposed acquisition does not proceed; or (2) ENN’s business profile remains largely stable after the acquisition, with the company maintaining adequate liquidity and funding the acquisition predominantly through internal cash resources and equity issuance proceeds. Such funding will avoid the risk of higher debt on ENN’s balance sheet and help the company maintain the ratio of adjusted FFO to debt at 20%.
Related Criteria And Research
-- ENN Energy Holdings Ltd. Ratings Placed On CreditWatch Negative On Cash Offer To Acquire China Gas, Dec. 13, 2011
-- Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011
-- General Criteria: Use Of CreditWatch And Outlooks, Sept. 14, 2009
-- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008
ENN Energy Holdings Ltd.
Corporate Credit Rating BBB-/Watch Neg/--
ENN Energy Holdings Ltd.
Senior Unsecured (1 issue) BBB-/Watch Neg