August 1 (SeeNews) - Moody's assigned on Monday a definitive Ba1 corporate family rating (CFR) and a probability of default rating (PDR) of Ba1-PD to Bulgarian Energy Holding (BEH), which pools all state-owned energy assets.
The global rating agency also assigned a definitive Ba2 rating to BEH's recently placed 550 million euro ($614.1 million) five-year senior unsecured bonds, which bear an annual coupon of 4.875%, it said in a statement.
The rating outlook is stable.
Moody's full statement follows:
"Moody's Investors Service (Moody's) has today assigned a definitive Ba1 corporate family rating (CFR) and assigned a probability of default rating (PDR) of Ba1-PD to Bulgarian Energy Holding EAD (BEH). Concurrently, Moody's has assigned a definitive Ba2 rating to the EUR550 million 4.875% senior unsecured bonds due in 2021 (the Bonds), to be issued by BEH on 2 August 2016, with a loss-given default (LDG) assessment of LGD5. The rating outlook is stable.
RATINGS RATIONALE
BEH's Ba1 corporate family rating reflects (1) the group's dominant position within the electricity generation industry in Bulgaria, which is an exporter of power to the wider Balkan region; (2) its improving financial profile as a result of tariff deficit reduction measures put in place in August 2015 and expectation that these will continue to support the company's cash flows at least until the market becomes liberalised; and (3) its ownership of Bulgaria's main gas transit and transmission and electricity transmission assets.
However, the rating is constrained by (1) the volatile earnings profile of the group which limits cash flow visibility; (2) the uncertainty with respect to full liberalisation of the wholesale power market in Bulgaria and its impact on BEH; (3) the relatively untransparent nature of the regulation of the gas and electricity transmission assets and the gas transit contracts; and (4) a weak liquidity management policy.
The rating incorporates three notches of uplift to BEH's standalone credit quality, expressed as a baseline credit assessment (BCA) of b1, to reflect the high likelihood that the Government of Bulgaria (Baa2 stable), BEH's 100% owner, would step in with timely support to avoid a payment default of BEH if this became necessary. BEH's BCA is considered weakly positioned at the b1 level.
BEH's strategy is to consolidate debt at the holding company level and with the issuance of the EUR550 million bonds this is expected to account for over 70% of total group debt. Holding company debt service is predominantly reliant on dividends being upstreamed, ensured through BEH's operating subsidiaries being required to distribute half of their net profits after certain allocations to retained earnings and reserves. Nevertheless, unsecured holding company creditors would be legally or structurally subordinated to claims of existing senior secured lenders and unsecured lenders/trade creditors of the subsidiaries.
Moody's notes that the issuance of the Bonds improves BEH's liquidity significantly, as it is sufficient to address its near term debt maturities, mainly consisting of the EUR535 million bridge to bond facility due in April 2017. It will enable the company to remove near term refinancing risk and create financial flexibility to more comfortably accommodate potential cash flow volatility. However, Moody's cautions that the group's liquidity management practices are weak and are fully reliant on internal cash flow generation.
RATIONALE FOR STABLE OUTLOOK
The stable outlook reflects the fact that, while BEH's standalone credit profile may be pressured over the short to medium term, the strategic role of the company in the Bulgarian energy sector and the oversight and support given by the Government would be supportive of BEH's overall financial status. Moody's notes the letter of support that the Bulgarian Government has provided to the holders of the Bonds as outlined in the Bonds prospectus.
The b1 BCA of BEH could be downgraded if BEH were to make significant payments under a recent arbitration award without receiving compensating amounts that had the effect of materially weakening its financial profile. The International Court of Arbitration recently judged that Natsionalna Eletricheska Kompania EAD (a BEH subsidiary) should be required to pay EUR550 million plus accruing interest to Atomstroyexport (ASE) with respect to nuclear equipment manufactured by the latter for the cancelled Belene project in Bulgaria. The stable outlook reflects Moody's view that a one notch downgrade of the BCA may not result in a downgrade of the final rating.
WHAT COULD CHANGE THE RATING UP/DOWN
Currently, there is limited upward rating potential in light of the uncertainties over the settlement of the Belene arbitration award and the timing and nature of the full liberalisation of the wholesale electricity market and its impact on BEH.
Downward rating pressure may develop if (1) BEH does not receive timely support from the Government if such were needed, including for potential payments to ASE; or (2) Moody's were to reassess the estimate of high support from the Government of Bulgaria; or (3) the Government's rating were to be downgraded.
Moody's would expect BEH to maintain FFO/debt of at least in the high teens in percentage terms to maintain the existing b1 BCA. Downward pressure could be exerted on the BCA if (1) the positive regulatory changes implemented in 2015 were to be reversed as a result of market liberalisation or other reasons, and this were to cause further deficits incurred by BEH; and (2) changes in BEH's operating environment, including due to market liberalisation, led to a significant deterioration in its financial profile.
The methodologies used in these ratings were Regulated Electric and Gas Utilities published in December 2013, and Government Related Issuers published in October 2014. Please see the Ratings Methodologies page on www.moodys.com for a copy of these methodologies.
Bulgarian Energy Holding EAD is the incumbent 100% state owned electricity and gas utility in Bulgaria. It owns around 50% of the electricity generation facilities in the country, including the 2,000MW nuclear power plant, 2,713 MW of hydro plants, as well as a lignite plant, the input fuel for which is sourced at BEH-owned mining facilities. Through its subsidiary Natsionalna Elektricheska Kompania EAD, it is the single trader on the regulated wholesale power market. It also owns and operates the high voltage electricity transmission grid and the gas transmission and transit networks in Bulgaria, and is also the main regulated wholesale gas supplier. In 2015, BEH group generated BGN675 million of EBITDA (around EUR345 million)."
($=0.8957 euro)