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Borrow money for IPO? Shanghai Port pays the price with a rating cut

Shanghai International Port (Group), operator of the world’s largest container harbour, has had its long-term corporate credit rating cut from “AA-” to “A+” by SP Global Ratings, due to its debt-funded investment in the initial public offering of Postal Savings Bank of China, according to a statement.

The port operator will see its finances rapidly deteriorate, following its HK$16 billion subscription of Postal Bank’s IPO, as debt ballons to as much as 37 billion yuan from 21 billion yuan (HK$24.4 billion) at the end of 2015, SP analyst Gloria Lu said.

Postal Bank, whose shares began trading in Hong Kong on September 28, raised HK$56.63 billion (US$7.3 billion) in the world’s largest IPO in two years. It will be included in the Hang Seng Global Composite Index and the Hang Seng Composite Index, including its sub-indexes, from October 13.

The Postal Bank investment — which must be locked up for six months — will significantly weaken Shanghai Port’s key credit metrics over the next two years, even though it’s a long-term strategic asset for the company in pursuit of business diversification, Lu said.

The investment will drag down Shanghai Port’s ratio of funds from operations (FFO) to debt to between 26 per cent and 29 per cent in the three years up to 2018, from over 60 per cent at the end of last year, SP said.

The high debt ratio is increasing while Shanghai Port’s business is expected to only grow 3 per cent a year between 2016 and 2020 amid China’s economic slowdown, industrial structural adjustment and commodity price slumps, the rating agency said.

“In our view, Shanghai Port has no further room to increase its indebtedness following the Postal Bank investment,” SP said.

Warut Promboon, Dagong Global Credit’s chief rating officer, disagrees. The Shanghai Port investment is in fact “fairly liquid,” Promboon said.

“Shanghai Port is not immediately short of any cash to service its debt,” Promboon said. “The company is not under financial stress, in our view. So the investment itself does not alter Shanghai Port’s financial risk profile, given that such investments can be liquidated in six months to repay the debt if needed.”

SP said there may be extraordinary support from the Shanghai government if any financial stress occurs, which controls 61 per cent of the port operator, due to its important role in cargo trade for the city and the whole Yangtze River Delta region.

It maintains a stable outlook on Shanghai Port, as a stable cash flow is expected over the next two years.

Shares of Shanghai Port rose 0.2 per cent on Friday to 5.12 yuan, before SP’s downgrade.

Additional reporting by Liz Mak