February 7 (SeeNews) - Moody's Investors Service said that it affirmed state-owned power, gas and mining company Bulgarian Energy Holding's (BEH) long-term corporate family rating at Ba1, its probability of default rating at Ba1-PD, and kept the Ba2 ratings of its senior unsecured eurobonds.
The outlook on the ratings is upgraded to positive from stable while the baseline credit assessment (BCA) is moved to ba3 from b1, Moody's Investors Service said in a statement on Monday.
The rating affirmation and BCA's upgrade were motivated by BEH's improved standalone credit profile resulting from significantly better financial metrics as well as progress in the liberalisation of the Bulgarian electricity and gas markets, given the group's favourable electricity generation profile and dominant domestic position as gas supplier, the US-based ratings agency noted.
In September, BEH reported a 92% annual surge in standalone net profit to some 1.4 billion levs ($767.1 million/715.8 million euro) in the first nine months of 2022, due toa spike in energy prices which had also led to its consolidated first-half net revenue skyrocketing. The holding, which pools state-owned energy companies and holds more than half of the country's generation capacity, contributed to Bulgaria's Electricity System Security Fund (ESSF) as part of fiscal measures providing compensations to businesses for high energy prices.
Moody's Investors Service also said in its statement:
"Despite material capital expenditure, especially for gas infrastructure, BEH's leverage metrics improved over time and are likely to stay strong on the back of high power prices. The rating affirmation is further supported by the ongoing tangible financial support that has been provided by the company's sole owner, the Government of Bulgaria (Baa1 stable), leading to an overall final CFR of Ba1.
The change in outlook to positive reflects the increased probability that BEH will exhibit a profile commensurate with a ba2 BCA / Baa3 final rating over the short to medium term. The higher rating could be achieved if BEH continues to operate with low financial leverage, and the electricity and gas markets are fully liberalized, on the assumption that BEH's business profile doesn't deteriorate significantly through either a higher risk business mix or material negative government intervention that exposed the company to higher financial risks.
BEH's rating is supported by the group's low-carbon power generation mix with around 75% of output stemming from nuclear and hydropower plants and its ownership of strategic parts of the domestic energy infrastructure, such as the gas and electricity transmission grids, which are regulated and contribute around 25% of annual EBITDA. Furthermore, the progress in the liberalization of the electricity and gas markets has put BEH into a beneficial position to benefit from high power prices.
However, the rating is constrained by BEH's extraordinary contributions to the Security of the Electricity System Fund (SESF) in 2022 and a lack of visibility as to what such amounts may be in the future. Due to strong financial performance in combination with a lack of clear financial policies, we see a prevailing risk of further calls to fund compensation schemes for end-customers via the SESF or extended dividend payments to the government. In addition, the political instability in Bulgaria with new elections scheduled for 2 April 2023 creates uncertainties around the execution of Bulgaria's energy policy. Furthermore, we assess the stand-alone liquidity management as weak. BEH relies almost exclusively on internally generated cash flows for its liquidity management, which is centralized at the parent company level. As liquidity back-up lines only exist in the form of small overdraft facilities on subsidiary level, the company is exposed to market disruption risk.
Nevertheless, BEH currently displays financial flexibility and low leverage, expressed as funds from operations (FFO) to net debt, which in 2021 amounted to around 139%. Except for further extraordinary payments to the SESF or accelerated dividend payouts Moody's anticipates a further strengthening of the leverage metrics over the next months as a result of low-cost generation capacity and high electricity market prices. We expect BEH to be fully in compliance with its financial covenants.
BEH falls under Moody's Government-Related Issuers Methodology due to its 100% ownership by the Government of Bulgaria (Baa1 stable). Accordingly, and based on Moody's view of high default dependence and high support in case of financial distress, BEH's Ba1 CFR incorporates two notches of uplift from its BCA of ba3. The high support was underpinned in 2022 by the government granting a state loan to BEH's subsidiary Bulgargaz, the monopoly gas supplier in Bulgaria, in the total amount of BGN 800 million to secure the company's liquidity after the cessation of Russian gas supply.
The Ba2 rating (LGD5) of the senior unsecured Eurobonds is one notch below the Ba1 CFR and reflects a degree of structural subordination of noteholders to the significant amount of debt at BEH's subsidiaries.
RATIONALE FOR THE POSITIVE OUTLOOK
The positive outlook reflects Moody's expectations that BEH will continue to operate with low financial leverage, and will benefit from the continued liberalization of Bulgaria's energy markets. While the wholesale electricity market was fully liberalized in 2021, the retail market remains partly regulated until the end of 2025. However, from July 2023 electricity generators are expected to sell their generated volumes on the free market to end-suppliers, which is beneficial as higher sales prices can be achieved in comparison to regulated prices.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
The rating could be upgraded if (1) the market liberalization process is fully completed and proves to remain beneficial for BEH, reflected in improved earnings of the group's generation subsidiaries subject to extraordinary payments to either the SESF or government; (2) the company is able to achieve a financial profile significantly above FFO / Net Debt of 25% on a sustained basis; and (3) the credit quality and Moody's support expectations of the Government of Bulgaria remain at least unchanged.
Downward pressure on the BCA could occur if BEH's financial profile were to deteriorate persistently below FFO / Net Debt of at least 25% as a result of, but not limited to, (1) adverse changes in the operating environment, including cash distributions above expectations; or (2) negative regulatory changes, or both. Downward pressure on the final rating may develop if (1) Moody's was to reassess the estimate of high support from the Bulgarian government, or (2) the government's rating was to be downgraded.
(1 euro = 1.95583 levs)