OREANDA-NEWS. September 28, 2015. Fitch Ratings says China-based city gas distributor ENN Energy Holdings Limited's (ENN, BBB/Stable) proposed US dollar bond repurchase offer has no material impact on its ratings, but reducing the outstanding non-functional currency denominated debts will likely reduce its foreign exchange risks.

ENN says in its recent announcement that it offers to repurchase all of its outstanding USD400m 3.25% bonds due 2019. The management plans to fund the repurchase plan mainly by borrowing yuan in China and maintain its cash position largely stable. The company's un-utilised credit lines from domestic banks can sufficiently cover the repurchase cost, according to the management. There could be short-term changes to ENN's debt maturity distribution after the refinancing, but the concern is largely mitigated by ENN's large cash buffer (CNY5.7bn or USD0.9bn at 30 June 2015) and its good access to capital markets.

Fitch expects the financial impact from the repurchase offer to be very limited as long as ENN can borrow domestically at rates not too much higher compared with the US dollar bond. Assuming the interest rate of yuan borrowing to be 100bps higher than the 3.25% US dollar bonds, the net increase in ENN's financial cost per year will be around CNY26m. The one-off loss directly related to the repurchase is also estimated at only around CNY20m. These are immaterial compared with ENN's EBITDA of over CNY4bn in 2015 as estimated by Fitch. In addition, Fitch expects the company's gross and net debt level to remain largely stable after the company refinances domestically.

Besides the USD400m bonds in the repurchase offer, ENN's US dollar liability exposure also includes its USD750m 6% bonds due 2021, USD500m convertible bond due 2018 and some US dollar bank loans. These US dollar denominated debts account for around 75% of ENN's total borrowings of CNY14.3bn (USD2.2bn) by 30 June 2015. If the USD400m bonds are fully replaced by new yuan borrowings, ENN's US dollar dominated debts will drop to around 60% of total debt. Fitch believes that as the majority of ENN's assets and cash generation are within China and yuan denominated, gradually matching its debt with its yuan denominated cash generation will effectively reduce its future foreign exchange risks.

ENN's 'BBB' rating is underpinned by favourable government policies towards the city gas distribution sector in China, ENN's strong business profile and its sound credit metrics. Incorporating the repurchase, Fitch forecasts ENN's funds flow from operations (FFO) adjusted net leverage to maintain around 3x (2014:1.5x) in the next three to four years which is appropriate for its rating.