December 29 (SeeNews) - Standard&Poor's said it has affirmed Bulgarian power utility NEK long-term corporate credit rating at B and kept it on CreditWatch negative.
“The CreditWatch reflects continued pressures on NEK's credit quality if the company's profits and cash flows remain weak, or if continuing electricity industry challenges diminish support from its parent Bulgarian Energy Holding (BEH) to cover external debt payments,” S&P said in a statement on Wednesday.
NEK was placed on CreditWatch on October 10.
NEK is a fully-owned subsidiary of state-run Bulgarian Energy Holding (BEH).
S&P also said in the statement:
“In December 2016, the Bulgarian government provided NEK with a €601.6 million loan and NEK used the proceeds to fully repay its litigation obligation to Atomstroyexport (ASE). The government loan is long term (seven years), has zero interest, and doesn't stipulate an event of default, but it is not subordinated to NEK's other debt; and if NEK manages to sell the nuclear assets received from ASE, it would need to prepay the government for its loan up to the amount received as sale proceeds in three days. Therefore, we treat it as debt, although we note its favorable structure.
Although the litigation issue has been resolved without impacting NEK's liquidity, the company's profitability and cash flow remain well below our expectations, despite better supplier terms and the compensation of expenses via the Security of the Electricity System Fund established by the regulator. NEK continues to carry out the function of a public electricity provider in the country; and the electricity prices remain low. We do not expect any further material regulatory changes in the near term following the government's resignation in mid-November. We continue to see uncertainties regarding the ability of NEK and BEH to improve profitability and cash flow by early 2017.
We continue to believe that NEK's financial position remains unsustainable in the long term and its stand-alone capacity to meet its financial obligations mainly depends on how quickly the recent changes in regulatory conditions will translate into positive cash flow generation. NEK's losses have reduced, but the company's EBITDA and funds from operations (FFO) remained negative in the first nine months of 2016. Our 'ccc+' assessment of NEK's stand-alone credit profile (SACP) therefore includes ongoing support from the parent. In particular, we understand most of NEK's debt is due to the parent. As of Sept. 30, 2016, more than 90% NEK's Bulgarian lev (BGN) 2.4 billion (€1.2 billion) debt is to BEH, and we understand that after Dec. 8, 2016, NEK's debt will also include €601.6 million of debt to the Bulgarian government.
We continue to regard NEK as a strategically important subsidiary of BEH. We consequently factor in two notches of uplift from NEK's 'ccc+' SACP. Our rating on NEK is capped at one notch below the 'b+' group credit profile (GCP). Although we do not rate BEH, we factor its credit quality into our rating on NEK. We regard BEH as a government-related entity with moderate likelihood of extraordinary state support. Our assessment of BEH's GCP is 'b+', factoring in potential extraordinary state support. That said, in our view, BEH's future credit quality could be affected if NEK's performance remains weak, or if NEK's liquidity issues erode BEH's standing on financial markets.
In our view, NEK should avoid default on its minimal external debt obligations over the next 12 months if it obtains timely financial support from BEH and from the government. If NEK fails to obtain such support, we may reassess our view on NEK's status in the group and with regard to the government.
We view NEK's liquidity as weak, because of potential liquidity shortfalls in the next 12 months. We base our assessment on the company's stand-alone liquidity arrangements. We understand that BEH is willing, and so far is able, to provide sufficient liquidity support to NEK in a timely manner.
We understand that NEK continues to breach its current financial ratio covenant on some of its loans. We think there is a low risk of the loan maturities being accelerated, however, because most of the loans that have this covenant benefit from a government guarantee.
The CreditWatch status reflects continued pressure on the rating if NEK's profitability and cash flow do not return to positive in early 2017, despite the recent regulatory reforms and improving supplier terms. In our view, this could affect NEK's stand-alone credit quality, as well as our view of the parent's credit quality and BEH's ability to continue to provide ongoing liquidity support to NEK. The CreditWatch also reflects risks to liquidity if NEK doesn't receive sufficient financial support from the government or BEH to cover its ongoing payments on external debt. We will reassess the situation within the next three months.
We would likely lower the rating if NEK accumulates new power tariff deficits and continues to accumulate mounting overdue payables. We could also lower the rating in case of continuing liquidity pressures, or if parental support from BEH diminishes.
We could affirm the rating if NEK demonstrates sustainable profits and cash flows, and continues to enjoy group support.”