Fitch Assigns Vietnam’s Ho Chi Minh Power First-Time ‘BB’; Outlook Positive.

25-Sep-2021 Intellasia | Fitchratings | 7:05 AM Print This Post

Fitch Ratings has assigned Vietnam-based Ho Chi Minh Power Corporation (EVNHCMC) a Long-Term Foreign-Currency Issuer Default Rating (IDR) of ‘BB’ with a Stable Outlook.

EVNHCMC’s rating is based on the consolidated credit profile of Vietnam Electricity (EVN, BB/Stable), which owns 100 percent of the company, in line with Fitch’s Parent and Subsidiary Linkage Rating Criteria. The consolidated rating approach is driven by the strong integration of EVNHCMC’s credit profile with that of its parent. Fitch assesses EVNHCMC’s Standalone Credit Profile (SCP) at ‘bb’, the same as that of EVN and the Vietnam sovereign rating (BB/Stable).

EVN’s SCP benefits from its position as the owner and operator of Vietnam’s electricity transmission and distribution network, and the company’s near 54 percent share of the country’s installed generation capacity. Fitch’s government-Related Entities Rating Criteria equalises EVN’s rating with that of the sovereign should its SCP weaken, provided the likelihood of state support remains intact.

Key Rating Drivers

Strong Integration with Parent: EVN determines EVNHCMC’s profit through a bulk-supply tariff-setting mechanism. The bulk-supply tariff aims to cover EVNHCMC’s costs and earn a profit that will allow the company to maintain operations and meet investment plans. EVN also appoints EVNHCMC’s key management, approves its business and investment plans, oversees the subsidiary’s financial management, and approves key executives’ compensation packages. EVN and the government guaranteed around 45 percent of EVNHCMC’s total borrowings at end-2019.

Market Position Supports SCP: EVNHCMC’s SCP is assessed at the same level as EVN’s given the high influence the parent has on EVNHCMC’s business plans and financial profile including profitability, though we believe EVNHCMC’s credit metrics are stronger than that commensurate for its credit assessment. EVNHCMC’s SCP is supported by its dominant market position in electricity distribution in Vietnam’s HCM City, its diversified counterparties and low receivable days. EVNHCMC’s credit profile, similar to that of its parent, is constrained by the regulatory framework’s short history and political risks, and the short period for which tariffs are set in the framework.

Diversified Counterparties, Low Receivables Risk: EVNHCMC’s credit profile benefits from its stable and diversified customer base. More stable residential customers account for 44 percent of EVNHCMC’s revenue and its top-20 customers account for around 5 percent of its total revenue. Lower counterparty risk is also reflected in EVNHCMC’s high collection rates of almost 100 percent and low receivable days of around five days.

Tariff Increase Restrictions; Lower ROE: EVN can increase retail electricity tariffs every six months to meet rising production costs, in accordance with the regulatory framework that was introduced in August 2017. However, automatic adjustments are limited to 5%, with price increases of 5%-10 percent requiring approval from the Ministry of Industry and Trade, and larger increases requiring approval from the prime minister.

Nevertheless, we expect delays in implementing tariff increases in general and the current challenging macroeconomic conditions may adversely affect businesses and individuals, who may strongly oppose any tariff increases. EVN sets the major cost of electricity purchase through the bulk-supply tariff for distribution companies, including EVNHCMC, with the aim of providing a modest profit.

High Capex Forecast: Fitch expects EVNHCMC’s capex to remain high. The company plans an annual outlay of VND4 trillion-5 trillion over the next three to four years (2019: VND3.5 trillion). EVNHCMC’s capex is mainly for the enhancement of the distribution grid and building substations and transmission lines to improve power supply capacity. Fitch estimates EVNHCMC’s FFO net leverage will stay under 2.0x over the next three years after increasing to about 2.2x in 2020 (2019: 1.5x).

EVN’s Strong State Linkages: Fitch sees EVN’s status, ownership and control by the Vietnam sovereign as ‘Very Strong’. The state fully owns EVN, appoints its board and senior management, directs investments and approves tariff hikes in excess of 5%. The support record and our expectations of state support for EVN are ‘Strong’. The state has provided guarantees, step-down loans, loans from state-owned banks at preferential rates, subsidies for strategically important projects and tax incentives. We expect support to be available, if needed, even though the government intends to cut direct support for state-owned enterprises and contain sovereign debt levels.

Strong Incentive to Support EVN: Fitch believes the socio-political implications of a potential EVN default are ‘Strong’, as it would lead to service disruption in light of the company’s entrenched position across the electricity-sector value chain. It would also be difficult to import fuel stock and fund new power investments. We see the financial implications of a potential default by EVN as ‘Very Strong’, as this would significantly affect the availability and cost of domestic and foreign financing options for the state and government-related entities, as EVN is one of Vietnam’s key borrowers.

Derivation Summary

EVNHCMC’s credit profile and rating assessment are driven by that of its parent, EVN, considering the strong linkages between the two and the extensive influence EVN has on EVNHCMC’s business plans and financial profile, including profitability.

PT Perusahaan Listrik Negara (Persero) (PLN, BBB/Stable, SCP: bb+) and Korea Electric Power Corporation (KEPCO, AA-/Stable, SCP: bbb) are similar to EVN as they are monopolies in their countries’ electricity transmission and distribution sectors, and own and operate the majority of installed power-generation capacity. PLN and KEPCO’s IDRs are equalised with those of Indonesia (BBB/Stable) and South Korea (AA-/Stable), respectively, per Fitch’s government-Related Entities Rating Criteria.

Fitch assesses PLN’s linkages with the state and the state’s incentive to support as ‘Very Strong’. We assess KEPCO’s status, ownership and control, and support record and expectations as ‘Strong’, while the state’s incentives to support are assessed as ‘Very Strong’. Meanwhile, we asses EVN’s status, ownership and control and financial implications of a default as ‘Very Strong’, whereas the support record and expectations, along with the socio-political impact of a default, are assessed as ‘Strong’.

Key Assumptions

Fitch’s Key Assumptions Within Our Rating Case for the Issuer

HCM City’s electricity demand to rise by 1 percent in 2020, lower than the 7 percent average in the last few years, due to the effects of the coronavirus pandemic. Demand to rise by around 7 percent per year after 2020.

Average retail tariffs to decrease by 1 percent and bulk-supply tariffs to increase by 1 percent in 2020. Average retail tariffs to remain flat thereafter with the bulk-supply tariff declining by 1 percent in 2021.

Distribution losses of around 4 percent per year (2019 and 2018: 4%).

Capex of VND4 trillion per year in 2020 and 2021, increasing to VND5 trillion per year in 2022 and 2023.

Blended interest rate of 4.5 percent in 2020, increasing gradually to 6 percent in 2023

RATING SENSITIVITIES

Factors that could, individually or collectively, lead to positive rating action/upgrade:

Positive rating action on EVN

Factors that could, individually or collectively, lead to negative rating action/downgrade:

Negative rating action on EVN

For EVN’s ratings, the following sensitivities were outlined by Fitch in a rating action commentary on 15 September 2020:

Factors that could, individually or collectively, lead to positive rating action/upgrade:

Positive rating action on the sovereign, provided the likelihood of state support does not deteriorate significantly

Factors that could, individually or collectively, lead to negative rating action/downgrade:

Negative rating action on the sovereign

Deterioration in EVN’s SCP, along with significant weakening in linkages with the state. We see this as a remote prospect in the medium term.

Best/Worst Case Rating Scenario

International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best and worst-case scenario credit ratings for all rating categories ranges from ‘AAA’ to ‘D’. Best and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.

Liquidity and Debt Structure

EVNHCMC had VND4 trillion of cash and cash equivalents at end-2019, against current debt maturities of VND1.3 trillion. Fitch expects the company to generate negative free cash flow in the near-to-medium term due to high capex. However, we believe its liquidity will be supported by its direct and indirect linkages to EVN and the state, respectively.

Date of Relevant Committee

11 September 2020

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

Public Ratings with Credit Linkage to other ratings

EVNHCMC’s rating is directly linked to the credit quality of its parent, EVN. A change in Fitch’s assessment of the credit quality of EVN would automatically result in a change in the rating on EVNHCMC.

ESG CONSIDERATIONS

The highest level of ESG credit relevance, if present, is a score of 3. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity(ies), either due to their nature or to the way in which they are being managed by the entity(ies). For more information on Fitch’s ESG Relevance Scores, visit www.fitchratings.com/esg.

https://www.fitchratings.com/research/corporate-finance/fitch-assigns-vietnam-ho-chi-minh-power-first-time-bb-rating-outlook-stable-24-09-2020

 

Category: Business, Vietnam

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