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Research Update: AusNet Services Ltd. Outlook Revised To Negative On Potential Ownership Change; 'A-' Rating Affirmed

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Research Update: AusNet Services Ltd. Outlook Revised To Negative On Potential Ownership Change; 'A-' Rating Affirmed

Rating Action Overview

  • AusNet Services Ltd. is facing ownership change in the near term following its agreement to enter a scheme implementation deed with the Brookfield consortium for acquisition of 100% shares in AusNet group.
  • We think AusNet would have a more aggressive capital structure under the Brookfield consortium or other superior proposal if it were to emerge and be successful.
  • Therefore, we have revised our outlook on AusNet Services to negative from stable and affirmed our 'A-' ratings on AusNet group companies.
  • The negative outlook primarily reflects the incremental risk to AusNet's capital structure and financial policies under potential new owners should any takeover offer succeed.

Rating Action Rationale

The negative outlook on AusNet Services reflects a high probability of ownership change in the next six to 12 months and an associated increase in its financial leverage. It is difficult to predict the degree of weakening in credit quality should any takeover offer succeed. However, we believe the rating could weaken by at least one notch as new owners are more likely to extract value from AusNet's balance sheet given its strong business position. AusNet group has been a takeover target since mid-September 2021.

If the Brookfield consortium were successful, we would expect them to adopt an aggressive approach to managing the balance sheet relative to the current owners. We base our view on our assessment of Brookfield's approach to managing its majority owned investments in Australia to date. AusNet recently entered into a scheme implementation deed with the Brookfield consortium to acquire 100% of AusNet's shares. Important to our assessment will be AusNet's future capital structure, financial policies, growth strategy, and parent support under Brookfield management. Implementation of the scheme with Brookfield is subject to a number of conditions and approvals, including absence of any superior proposal.

Even if any alternate or superior proposal were to emerge, AusNet is more likely to see an aggressive capital structure on an ongoing basis than it currently has. This is because the conservative risk appetite of the current shareholders is less likely to be adopted by the new owners. By extension, the new owners will look to efficiently use AusNet's balance sheet capacity to fund its large capital expenditure pipeline and growth prospects in the unregulated services segment leading to a gradual increase in leverage. Under any change of ownership, financial and growth strategies, shareholder distributions, and target financial metrics over the medium term will be important for the rating assessment.

We do not foresee any immediate and material change to AusNet's business profile under potential ownership change. AusNet's portfolio of three distinct regulated businesses provide cash flow stability and contribute about 90% of its EBITDA. These cash flows provide a platform to support growth opportunities in the unregulated segment, primarily focused on connecting renewable projects to the electricity grid. The new owners are likely to grow the unregulated cash flows and we will assess the pace of such growth and how such growth is funded.

Outlook

The negative outlook primarily reflects the incremental risk to AusNet's capital structure and financial policies under potential new owners should any takeover offer succeed. The future growth strategy and approach to funding such growth will also influence the ratings.

Downside scenario

While it is difficult to predict the degree of change, the rating could weaken by at least one or two notches.

This will be a function of: a) the level of debt increase at the time of ownership change; b) the approach to funding the large future capital expenditures(capex), including the Western Victoria Transmission Link; c) strategy for growing unregulated business opportunities; d) target financial policies; and e) ownership support, if any.

Upside scenario

We would revise the outlook to stable if the takeover is not successful and there is no ownership change. Under this scenario we would expect AusNet to operate with its current capital structure and policies.

Company Description

AusNet Services Ltd. is a holding company that owns and operates a portfolio of regulated electricity and gas networks in the Australian State of Victoria. It is one of the largest network operators in Australia, with a pure regulated asset base of about A$10.0 billion as of March 31, 2021, and unregulated/contracted assets of A$1.2 billion. AusNet is listed on the Australian Stock Exchange and has two major shareholders: Singapore Power International Pte Ltd. (32.7% share) and State Grid International Development Ltd. (19.9% share), which is the offshore investment arm of State Grid Corp of China.

Ratings Score Snapshot

Issuer Credit Rating: A-/Negative/--

Business risk: Excellent

  • Country risk: Very Low
  • Industry risk: Very Low
  • Competitive position: Excellent

Financial risk: Significant

  • Cash flow/Leverage: Significant

Anchor: a-

Modifiers

  • Diversification/Portfolio effect: Neutral (no impact)
  • Capital structure: Neutral (no impact)
  • Financial policy: Neutral (no impact)
  • Liquidity: Adequate (no impact)
  • Management and governance: Satisfactory (no impact)
  • Comparable rating analysis: Neutral (no impact)

Stand-alone credit profile: a-

Related Criteria

Ratings List

Ratings Affirmed

AusNet Services Holdings Pty Ltd.

Senior Unsecured A-
Junior Subordinated BBB
Commercial Paper A-2
Ratings Affirmed; CreditWatch/Outlook Action
To From

AusNet Services Ltd.

Issuer Credit Rating A-/Negative/-- A-/Stable/--

AusNet Electricity Services Pty Ltd.

AusNet Transmission Group Pty Ltd.

Issuer Credit Rating A-/Negative/NR A-/Stable/NR

AusNet Services Holdings Pty Ltd.

Issuer Credit Rating A-/Negative/A-2 A-/Stable/A-2

S&P Global Ratings Australia Pty Ltd holds Australian financial services license number 337565 under the Corporations Act 2001. S&P Global Ratings' credit ratings and related research are not intended for and must not be distributed to any person in Australia other than a wholesale client (as defined in Chapter 7 of the Corporations Act).

Certain terms used in this report, particularly certain adjectives used to express our view on rating relevant factors, have specific meanings ascribed to them in our criteria, and should therefore be read in conjunction with such criteria. Please see Ratings Criteria at www.standardandpoors.com for further information. Complete ratings information is available to subscribers of RatingsDirect at www.capitaliq.com. All ratings affected by this rating action can be found on S&P Global Ratings' public website at www.standardandpoors.com. Use the Ratings search box located in the left column.

Primary Credit Analyst:Parvathy Iyer, Melbourne + 61 3 9631 2034;
parvathy.iyer@spglobal.com
Secondary Contact:Richard M Langberg, Hong Kong + 852 2533 3516;
Richard.Langberg@spglobal.com

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