November 26 (SeeNews) - Fitch Ratings said that it has maintained financial group Eurohold Bulgaria [BUL:4EH] and its core insurance subsidiaries' ratings on rating watch negative (RWN).
The rating action follows Eurohold's announcement that it intends to pursue the acquisition of Czech CEZ's Bulgarian assets despite the rejection of the proposed 335 million euro deal by Bulgaria's competition authority in October, the ratings agency said in a statement on Monday.
Fitch rates Eurohold Bulgaria's long-term issuer default rating at B, while the company's three units - Insurance Company EIG Re, Euroins Romania Asigurare-Reasigurare, and Insurance Company Euroins have BB- ratings.
Fitch Ratings also said in its statement:
"The planned high debt proportion in the financing structure could significantly reduce distributable earnings from the CEZ assets, especially in the initial period. However, power distribution, the largest and most profitable business in the transaction, is regulated and produces stable cash flows, and therefore the acquisition of the CEZ assets should contribute to higher stability and predictability of Eurohold's earnings. This could contribute positively to the group's credit profile in the medium to long term.
Eurohold lacks previous management experience in power utilities and will therefore rely on the current management of the CEZ assets to ensure smooth operations, which Fitch understands from management that Eurohold aims to retain. Additionally, Eurohold has formed an advisory board of energy experts, which is supporting the company on the acquisition process and will oversee the integration of the CEZ assets during and after transaction closing.
KEY RATING DRIVERS
Eurohold's ratings reflect Fitch's assessment of its weak capitalisation and debt servicing capabilities as well as high financial leverage. These weaknesses are partly offset by the group's good albeit volatile financial performance.
The group's consolidated capital strength measured by Fitch's Prism Factor-Based Capital Model (Prism FBM) was 'Weak' at end-2018 (end-2017: Weak). Fitch fully deducts goodwill from available capital, which significantly reduces the Prism FBM score due to the large amount of goodwill carried on Eurohold's balance sheet.
The capital position of the insurance activities housed within the Euroins Insurance Group (EIG) sub-holding benefit from significant double leverage. Eurohold frequently provides capital to EIG to support business growth and ensure sound regulatory solvency. EIG had a very strong group Solvency 2 ratio (S2) of 172% at end-2018 (end-2017: 172%). However, the solo S2 ratios of main subsidiaries Euroins Bulgaria and Euroins Romania remain well below the consolidated S2 ratio.
The group's Fitch-calculated financial leverage ratio (FLR) of 69% at end-1H19 (end-2018: 65%) constrains the rating. A further EUR10 million loan from the International Investment Bank and lower equity due to accounting adjustments and dividends put pressure on the ratio in 1H19. Fitch excludes the portion of goodwill created in common control transactions from the FLR calculation.
Eurohold's fixed charge coverage (FCC) averaged 1.5x in the past three years but weakened in 2018 (1.3x) as higher operating expenses pressured the group's operating result. The FCC remains pressured by rapid debt accumulation between 2014 and 2016. Eurohold has potentially high refinancing risk in Fitch's view due to the relatively short-term and concentrated maturity structure of debt securities.
The weak performance of the core compulsory motor insurance business in Romania led to a 76% decrease in EIG's net result in 2018, and a 21% decrease in Eurohold's. The lower insurance result was only partly compensated by improved performance of non-insurance and significant financial gains realised at the holding company. We estimate Eurohold's pre-tax result excluding these gains would have been negative in 2018. Eurohold's 1H19 performance was stable with BGN4 million net profits (1H18: BGN4.1 million).
Fitch ranks EIG's Business Profile as 'moderate' compared with other insurance companies in Bulgaria, and given this ranking Fitch scores EIG's Business Profile at 'bbb-' under its credit factor scoring guidelines. EIG is a top six insurer in its two largest insurance markets Romania and Bulgaria with 12.5% and 8.3% end-2018 market shares based on gross premiums, respectively.
Fitch applied a tailored recovery analysis for the group, which resulted in a bespoke Recovery Rating to replace the baseline recovery assumption for the issuer's debt obligations. The recovery analysis, based on a going concern approach, resulted in a Recovery Rating of 'RR4' for senior unsecured debt issued under Eurohold's EMTN programme. As a result the ratings of Eurohold's EMTN debt programme, and EUR70 million senior notes issued under the programme, are aligned with the group's IDR.
There is no assurance that notes issued under the programme will be assigned a rating, or that the rating assigned to a specific issue under the programme will have the same rating as the rating assigned to the programme.
RATING SENSITIVITIES
Fitch will resolve the RWN following the final regulatory approval or rejection of the proposed acquisition and, if relevant, after completing its assessment of the standalone credit profile of CEZ assets and the final financing structure.
Eurohold's ratings could be downgraded if its FCC falls below zero on a sustained basis or the group's FLR weakens to above 70%. In addition, a downgrade would also result from one of the S2 ratios at the group's main operating subsidiaries falling to below 100%.
Following the resolution of the RWN, the ratings could be upgraded if the FLR improves to below 55% and the FCC improves above 1.5x for a sustained period. The ratings could also be upgraded if the Prism FBM score improves to 'Somewhat Weak'."