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Fitch affirms Eurohold Bulgaria at 'B', outlook stable

Jun 19, 2024, 12:56:39 PMArticle by Mihaela Miteva
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June 19 (SeeNews) - Fitch Ratings said it has affirmed energy and insurance group Eurohold Bulgaria's [BUL:EUBG] Long-Term Issuer Default Rating (IDR) at 'B' with a stable outlook.

Fitch affirms Eurohold Bulgaria at 'B', outlook stable
Fitch (Author: fitchratings.com) License: all rights reserved.

Earlier this week, Eurohold said it refinanced 500 million euro ($535.8 million) of debt raised for the acquisition of Czech energy group CEZ's Bulgarian operations in 2021, as well as their subsequent development and investments in energy business. The financing also includes a 15 million euro capital expenditure loan to upgrade and develop the power distribution network of Eurohold's subsidiary, Electrodustribution Grid West, in preparation for the upcoming liberalisation of the electricity market.

The rating reflects the group's reduced refinancing risk following the refinancing of the energy units' syndicate and mezzanine loan facilities, along with the predictable operating cash flows of its Bulgarian electricity distribution arm, Fitch Ratings said in a statement on Tuesday.

Fitch expects leverage within the group's rating sensitivities in 2024-2025, it said.

The rating action considers the structural subordination of Eurohold to its operating subsidiaries, limiting access to underlying cash flows due to financial covenants and profit distribution restrictions. It also accounts for the group's complex structure, corporate governance limitations and weak liquidity at the parent level.

Fitch also said in its statement:

"KEY RATING DRIVERS

Successful Refinancing: Eurohold recently closed a new bank syndication facility of EUR460 million and a JP Morgan loan (up to EUR65 million) to repay its EUR360 million bank syndicate facility it incurred for the CEZ asset acquisition in 2021 and its mezzanine debt (EUR117 million outstanding at end-2023). This will lead to lower interest costs, a smoother debt repayment schedule and lighter covenants following its energy business's solid performance after the CEZ acquisition. The new syndicate facility is broadly in line with the previous one, but with gradually increasing semi-annual instalments to final maturity in 2029. The new JP Morgan loan will mature in five years.

Solid 2023 Results: We estimate Eurohold's EBITDA rose 20% to a record BGN284 million (excluding the insurance business's EBITDA) based on its 4Q23 results, driven by exceptional results in distribution following lower costs of network losses than those approved in the tariff. Fitch expects earnings to normalise in 2024 and 2025 due to distribution tariff adjustments for lower balancing costs incurred in 2023. We forecast EBITDA to rise from 2026 on full liberalisation of the energy market in Bulgaria, translating into higher margins under its supply and trading division and good performance of the regulated distribution segment.

Regulated Income in Distribution: Eurohold's credit profile continues to benefit from stable electricity distribution, which has low business risk and greater cash flow predictability than its supply and trade segment. EBITDA from distribution amounted to BGN221 million in 2023, up from about BGN140 million in 2022, due to lower costs of network losses, a 1% increase in distributed energy volume and stable weighted average cost of capital (WACC) at 5.7%.

Eurohold managed to keep technological losses below the level approved by the regulator (6.15% versus approved 7.5% in 2023) and Fitch expects this good performance to continue in the next four years. We expect distribution EBITDA to normalise in 2024-2025 at about BGN150 million a year.

New Regulatory Period: We expect the new regulatory period starting from July 2024 to remain in broad continuity with the current framework. The seventh regulatory period will last three years. Fitch expects WACC to be slightly higher in the medium term, on average at 6.5% in 2024-2028, supporting Eurohold's planned investments in the distribution grid.

Projected Leverage within Sensitivities: EBITDA net leverage (excluding the insurance business's EBITDA and net debt) improved to 3.6x in 2023 from 4.7x in 2022 on higher-than-expected EBITDA and lower net debt (BGN1.0 billion outstanding, down from BGN1.1 billion at end-2022). Fitch expects EBITDA net leverage to increase to on average 5.3x in 2024-2025 on normalising EBTIDA, but for it to remain below our previous forecasts and comfortably within our rating sensitivities.

Relationship with Major Shareholder: Eurohold is majority-owned by Starcom Holding AD (50.08% at end-2023). Based on our Parent-Subsidiary Linkage (PSL) Criteria, we assess legal ringfencing and access and control as 'porous', which means that Eurohold may be rated up to two notches above the parent's consolidated profile. As a result, substantial deterioration of the credit profile of Starcom Holding, may lead to a rating downgrade.

Rating Approach: Fitch rates Eurohold using a consolidated approach but excluding the insurance business's EBITDA and net debt while including its dividends. This is because access to the insurance business's cash flow is limited, due to regulatory requirements to keep a minimum solvency ratio at insurance companies.

Eurohold's IDR is notched down two levels below the group's consolidated profile (excluding the insurance business) given its structural subordination. Eurohold's debt service capacity is contingent on dividend income from intermediate holding companies and operating subsidiaries (assuming covenant compliance) and it does not have direct access to their underlying operating cash flows.

Corporate Governance Limitations: The rating reflects Eurohold's complex group structure, large related-party transactions and lower financial transparency than at its EU peers, including qualified audit opinions for 2020-2022 stemming from a conflict between the group and the Romanian regulator Autoritatea de Supraveghere Financiara, for which Eurohold's subsidiary Euroins Insurance Group has officially launched an arbitrage procedure.

DERIVATION SUMMARY

Eurohold is smaller than other rated central European utilities such as Energa S.A. (BBB+/Stable) and Bulgarian Energy Holding EAD (BB+/Positive), although it is one of the largest utilities in Bulgaria. The group is focused on the distribution of electricity and supply. Historically, its EBITDA has been more volatile than that of many peers, but the Fitch rating case assumes stabilisation of EBITDA over 2024-2027, supported by the regulated distribution segment.

Its consolidated credit profile (after excluding its insurance business) is weaker than peers' due to high leverage. Eurohold's integrated business structure and strategic position in the domestic market make the group comparable with some central European peers such as Poland's Energa. However, Eurohold operates in a more volatile and less transparent regulatory environment than Energa, has higher leverage and its results are less predictable with some corporate governance limitations.

KEY ASSUMPTIONS

Fitch's Key Assumptions Within Our Rating Case for the Issuer:

- The new regulatory period starting from July 2024 in broad continuity with the current framework

- Return rate in distribution segment on average at 6.5% in 2024-2028

- Energy segment EBITDA to decrease in 2024-2025, following tariff adjustment in distribution, and increasing from 2026 following market liberalisation

- Consolidated EBITDA (excluding the insurance business) normalising at an average BGN210 million annually in 2024-2027

- Cumulative net capex in 2024-2027 of about BGN750 million, with capex focusing on network infrastructure development

RECOVERY ANALYSIS

- The recovery analysis assumes that Eurohold would be reorganised as a going concern (GC) in bankruptcy rather than liquidated

- A 10% administrative claim

- GC EBITDA of BGN184 million is 35% lower than 2023 EBITDA, reflecting expected normalisation of profitability

- Fitch applies a distressed enterprise value (EV)/EBITDA multiple of 6.5x to calculate a GC EV, reflecting its large share of regulated earnings, but also a volatile and less transparent operating environment

-With these assumptions, our waterfall-generated recovery computation (WGRG) for the senior unsecured notes of Eurohold is in the 'RR4' band, indicating a 'B' instrument rating. The WGRC output percentage on current metrics and assumptions is 37%.

RATING SENSITIVITIES

Factors That Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade:

- An improved consolidated group financial profile (excluding the insurance business) with net debt below 4.5x EBITDA on a sustained basis

Factors That Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade:

- Net debt of the consolidated group (excluding the insurance business) above 6x EBITDA on a sustained basis, for instance due to a more aggressive financial policy, higher distributions to shareholders and lower profitability and cash generation

- Significant weakening of the business profile with lower predictability of cash flow may lead to tighter leverage sensitivities or a downgrade

- Deterioration of the group's liquidity

- Substantial deterioration of the credit profile of Eurohold's majority shareholder

LIQUIDITY AND DEBT STRUCTURE

Improving, but still Weak Liquidity: The rating is constrained by weak liquidity at the Eurohold holding company level. As of end-March 2024 it had BGN89,000 cash and cash equivalents compared with BGN43.2 million of current financial liabilities. Eurohold has undertaken steps to improve its liquidity as it plans to issue warrants up to BGN130 million in 2024."

($ = 0.9333 euro)

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