OREANDA-NEWS. Fitch Ratings has assigned CK Hutchison Holdings Limited (CKHH) a Long-Term Foreign Currency Issuer Default Rating (IDR) of 'A-' with a Stable Outlook and a foreign currency senior unsecured rating of 'A-'. Fitch has simultaneously resolved the Rating Watch Evolving (RWE) on Hutchison Whampoa Limited's ratings, and affirmed and withdrawn its Long-Term Foreign Currency IDR and senior unsecured rating of 'A-', and Short-Term Foreign Currency IDR of 'F2'.

The assignment of ratings to CKHH follows from the completion of merging Hutchison Whampoa Limited's businesses with CKHH and the spinoff of CKHH's property business as Cheung Kong Property Holdings Limited (CK Property) on 3 June 2015. This reorganisation resulted in Hutchison Whampoa Limited becoming a wholly owned subsidiary of CKHH. Hutchison Whampoa Limited, excluding its property and hotel division, made up around 90% and 70% respectively of CKHH's pro forma EBITDA and assets in 2014.

The ratings of all of Hutchison Whampoa Limited's guaranteed notes and bonds have been replaced with CKHH's ratings as these are also guaranteed by CKHH. A full list of rating actions is at the end of this commentary.

KEY RATING DRIVERS

Diversified Business, Stable Cash Flow: CKHH's ratings reflect its strong business and geographical diversification, and stable cash flow generation from its high quality ports, retail, telecommunications, infrastructure and energy businesses. No single business division accounted for more than 31% of CKHH's pro forma EBITDA in 2014. The infrastructure and ports businesses (together 44% of pro forma EBITDA in 2014) provide visible, recurring cash flows.

Overall Risk Profile Not Materially Changed: The reorganisation of the group has not materially changed the risk profile of the group, in Fitch's view. While CKHH will not have cash flows from the generally stable high-quality property business with the latter's spin-off, with the reorganisation, CKHH will have increased contributions from the regulated utilities and infrastructure businesses. These operations include regulated utilities in the UK and Australia, which benefit from mature, transparent and supportive regulatory frameworks. In addition, we expect the company to use the HKD55bn cash received for the spun-off property assets to reduce its total debt requirement. Fitch also expects no material changes to the approach and discipline demonstrated in relation to the group's investments and capital structure by management following the reorganisation.

Capital Intensive Business: CKHH's infrastructure, ports and telecommunications businesses are capital intensive and contribute to the company's leverage profile, which constrains its ratings overall.

European Telecoms' Cash Drain Reversed: After a number of years of cash drain, 3 Group Europe posted positive free cash flow (EBITDA after capex and license fees) in 2014. Fitch expects the business to remain free cash flow positive over the medium term, with an increasing cash flow contribution, particularly if the O2 UK acquisition is completed.

Impact of Potential O2 Acquisition: CKHH's potential acquisition of O2 UK from Telefonica (BBB+/Stable) for GBP9.25bn (HKD111bn) and up to GBP1bn in deferred upside interest sharing payments, which will be payable after the combination of CKHH's existing mobile operations in the UK (3UK) and O2 UK's business reach a cumulative cash flow threshold, are subject to regulatory approval. CKHH plans to fund the acquisition through GBP6bn of non-recourse debt and through external equity investors, who would hold 32.98% in the combined 3UK O2 UK entity once the transaction is completed, with CKHH holding the remaining 67.02%.

The acquisition would significantly enhance the business profile of CKHH's telecommunications business because the combined 3UK and O2 UK entity would have the largest market share in the UK, with over 40% of mobile subscribers, compared with its current position as the smallest operator (around 13% of mobile subscribers at end-2014).

Assuming a mid-2016 completion, we expect CKHH's FFO adjusted net leverage to be higher than the 2014 pro forma of 3.3x, before improving in 2017 and 2018. Fitch has proportionally consolidated the combined 3UK O2 UK entity under this scenario.

Strong Liquidity and Access to Funding: CKHH's strong liquidity profile is supported by over HKD200bn of cash and cash equivalents at end-2014 pro forma. Liquidity was boosted by the HKD55bn received from the stock listing of CK Property. At end-2014, pro forma cash and cash equivalents were more than sufficient to repay all outstanding debt maturing through to 2018, and Fitch expects the company to continue to have strong access to capital markets for its refinancing needs.

KEY ASSUMPTIONS

Fitch's key assumptions within our rating case for the issuer include:
- Moderate Fitch adjusted revenue growth averaging 10% in 2015-17
- Fitch adjusted EBITDA margins averaging 21% in 2015-17
- Acquisition of O2 UK completed in mid-2016
- Dividend payout ratio of 30%-40% in 2015-17
- No disposals

RATING SENSITIVITIES

Negative: Future developments that may, individually or collectively, lead to negative rating action include:
- FFO adjusted net leverage exceeding 4.0x on a sustained basis;
- Materially negative free cash flow after acquisitions and disposals
-Significant change to business mix and capital structure management that are adverse to its credit risk profile.
- A weakening of quality or decreased quantity of recurring cash flows.

No positive rating action is expected in the near term due to the business and financial profile of CKHH.

FULL LIST OF RATING ACTIONS

CK Hutchison Holdings Limited
Long-Term Foreign-Currency IDR assigned at 'A-'; Outlook Stable
Senior unsecured rating assigned at 'A-'

The ratings of all of Hutchison Whampoa Limited's guaranteed notes and bonds have been replaced with CKHH's ratings as these are also guaranteed by the latter.

Hutchison Whampoa Europe Finance (12) Limited
Ratings on all senior unsecured bonds affirmed at 'A-', off RWE

Hutchison Whampoa Finance (06) Limited
Ratings on senior unsecured bond affirmed at 'A-', off RWE

Hutchison Whampoa Finance (09) Limited
Ratings on senior unsecured bond affirmed at 'A-', off RWE

Hutchison Whampoa Finance CI Limited
Ratings on all senior unsecured bonds affirmed at 'A-', off RWE

Hutchison Whampoa Finance UK PLC
Ratings on all senior unsecured bonds affirmed at 'A-', off RWE

Hutchison Whampoa International (03/33) Limited
Ratings on senior unsecured bonds affirmed at 'A-', off RWE

Hutchison Whampoa International (09) Limited
Ratings on senior unsecured bonds affirmed at 'A-', off RWE

Hutchison Whampoa International (09/16) Limited
Ratings on senior unsecured bonds affirmed at 'A-', off RWE

Hutchison Whampoa International (09/19) Limited
Ratings on senior unsecured bonds affirmed at 'A-', off RWE

Hutchison Whampoa International (10) Limited
Ratings on subordinated bonds affirmed at 'BBB', off RWE

Hutchison Whampoa International (11) Limited
Ratings on all senior unsecured bonds affirmed at 'A-', off RWE

Hutchison Whampoa International (12) (II) Limited
Ratings on all senior unsecured bonds affirmed at 'A-', off RWE

Hutchison Whampoa International (12) Limited
Ratings on subordinated bonds affirmed at 'BBB', off RWE

Hutchison Whampoa International (14) Limited
Ratings on all senior unsecured bonds affirmed at 'A-', off RWE

Hutchison Whampoa Europe Finance (13) Limited
Ratings on subordinated bonds affirmed at 'BBB', off RWE

Hutchison Whampoa Finance (14) Limited
Ratings on senior unsecured bonds affirmed at 'A-', off RWE

Hutchison Whampoa Limited
Long-Term Foreign Currency IDR affirmed at 'A-'/Stable Outlook, off RWE; withdrawn
Foreign currency senior unsecured rating affirmed at 'A-', off RWE; withdrawn
Short-Term Foreign Currency IDR affirmed at 'F2', off RWE; withdrawn

No equity credit has been assigned to Hutchison's USD2bn perpetual capital securities issued in October 2010 and 50% equity credit has been assigned to the USD1bn and EUR1.75bn perpetual securities.