Government right to worry about State credit rating, not that of generators

I’m underwhelmed by a report in the Brisbane Times that the credit ratings of Queensland Government-owned power generators CS Energy and Stanwell will drop if they are privatised:

Credit ratings agency Fitch has given the Electrical Trades Union its latest ammunition in its fight against the government’s privatisation plan.

Last week, Fitch announced it had revised the outlooks of state-owned electricity generation companies CS Energy and Stanwell from stable to negative, warning that a sell-off of the gencos could lead to a loss of the companies’ AA credit rating.

“The Outlook revision reflects a weakening in the strategic linkages between the State of Queensland (QLD, ‘AA’/Stable) and the company, should the entity be privatised, as viewed under Fitch’s parent-subsidiary rating methodology,” the credit ratings agency reported.

It would be unsurprising if their credit ratings fall, as their borrowings would no longer be guaranteed by the Queensland Government. If their credit ratings fall and borrowing costs rise, they would end up borrowing at a rate that is consistent with the risks the generators face in the market, which would lead to more efficient investment decisions. Also, the Government is correct to focus on its own overall credit rating, and I’m unsure why it should worry too much about the credit ratings of the generators. I see no problem with the Government divesting itself of assets that bring commercial risks onto the Government’s balance sheet, which the generators are obviously doing. Finally, by selling the generators, the Government would raise funds that would help pay down debt and restore Queensland’s AAA credit rating, which, in my view, would yield significant benefits to the State.

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