Fitch: Stable outlook for Asian utilities despite capex

Fitch Ratings-Beijing/Singapore-06 December 2011: Fitch Ratings said in a new report published today that it expects the credit profiles of Asian power and utilities issuers to remain stable in 2012. Although higher capex and slow tariff reforms will continue to exert pressure on their standalone financial profiles, these are mitigated by strong linkages with their respective governments or by the issuers' adequate rating headroom. An exception, however, is Chinese thermal power producers.

"The slow tariff reforms in many Asian markets continue to hurt the financial profiles of utilities companies. Moreover, most issuers are undertaking heavy investments to meet demand growth and state policy-driven targets, putting further pressure on credit profiles," says Steve Cox, Director in Fitch's Asia-Pacific Energy & Utilities team.

The report notes that Asian governments in their efforts to fight inflation in 2011 have held tariffs down at the expense of the financial health of the utilities sector. "The easing inflation in a number of markets across Asia, coupled with risks to the financial health of utilities issuers - and burden on government finances - as a result of holding tariffs down, may lead to some loosening of tariff controls," adds Mr. Cox.

Fitch forecasts a 15% increase in capex at its rated Asian utilities in 2012, which is likely to lead to 30% more negative free cash generation. Upcoming debt maturities also require substantial external funding. However, Asian utilities' strong linkages with their respective sovereigns mean the agency does not expect funding requirements to be a major challenge for the majority of the rated issuers. Fitch believes that access to capital by Asian utilities issuers will not be materially impaired by the eurozone credit crisis.

With regard to Chinese thermal power producers, significant capex programmes and material short-term debt that needs refinancing in 2012 will continue to put pressure on their financial profiles that have been substantially weakened over the last five years by weak tariffs and large debt-funded capex. They have little rating headroom for any increase in funding costs. M&A remains a potential risk, but only for a limited number of issuers, such as Cheung Kong Infrastructure Holdings Limited ('A-'/Stable). (ends)