Fitch puts CK Infrastructure on positive rating watch

Investing.com -- Fitch Ratings has put CK Infrastructure Holdings Limited’s (CKI) Long-Term Issuer Default Rating (IDR) and senior unsecured rating of ’A-’ on positive rating watch. This move follows CK Hutchison Holdings Limited’s (CKHH) decision to place its ratings on positive watch after announcing the sale of a large part of its port business.

CKI’s rating is based on its Standalone Credit Profile (SCP) of ’a-’, which matches CKHH’s rating. Fitch believes that CKI could potentially see a two-notch uplift from its SCP if CKHH’s ratings are upgraded, according to the Parent and Subsidiary Linkage Criteria. If there is a one-notch difference from CKI’s SCP, CKI’s rating could be notched up to the same level as CKHH.

The resolution of the positive rating watch on CKI will occur when the positive rating watch on CKHH is resolved. This process could take more than six months.

CKHH has a ’Medium’ strategic incentive to support CKI, as CKI’s business shows moderate growth potential and contributes about 12% of CKHH’s Fitch-adjusted EBITDA. CKI’s EBITDA contribution is expected to rise slightly following CKHH’s ports transaction. CKI provides a significant competitive advantage to CKHH due to its stable cash flow from a diverse portfolio of regulated utilities and infrastructure investments.

However, Fitch assesses that CKHH has a ’Weak’ legal incentive to support CKI, as there is no guaranteed debt or cross-default provisions in CKHH’s debt.

There were no regulatory resets in 2024, but resets are due in 2025 for Northumbrian Water Group (NWG), a UK water-related holding company, and SA Power Network and Wellington Electricity, Australian and New Zealand electricity distribution companies. Fitch does not expect these upcoming resets to be as stringent as in previous years, and expects CKI to continue to generate stable cash flow in the coming years.

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CKI’s cash flow contribution from its investment portfolio is expected to remain largely stable over the next two to three years. However, EBITDA after associates and minorities is expected to have slightly decreased in 2024 due to continued deterioration in its Hong Kong and China cement business amid economic weakness.

Net debt is expected to rise in 2025, due to recent acquisitions and a planned equity injection into Northumbrian Water, but to remain well below historical levels, reflecting stable cash flow. CKI’s overall financial profile should remain strong with EBITDA interest coverage at around 6.0x and EBITDA net leverage at around 3.0x in 2024-2025.

CKI’s ratings are supported by stable and predictable income from diverse regulated utilities and infrastructure investments. The company has few peers in terms of its business model. State Grid International Development Limited (SGID, A+/Negative, SCP: bbb+) has a similar business model, but CKI has higher-quality cash flow and a superior financial profile.

Fitch’s key assumptions for CKI include a 2% increase in cash inflow from associates, joint ventures and investments in 2024 and around 1% growth in 2025-2026, along with a dividend payout consistent with historical levels.

CKI had readily available cash at the end of June 2024 of HKD9.2 billion, against HKD13.2 billion of short-term debt maturities and total debt of HKD33.3 billion. The company has strong and proven access to banks and debt capital markets.

This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.

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