August 18 (SeeNews) - S&P Global Ratings said it has revised the outlook on Bulgarian power utility Natsionalna Elektricheska Kompania (NEK) to stable from negative and affirmed the state-owned company's long-term issuer credit rating at 'B+'.
The outlook revision reflects S&P's view that the credit quality of NEK's parent, state-owned Bulgarian Energy Holding (BEH), has stabilized, the ratings agency said in a statement last week.
According to S&P, NEK's rating will continue to be driven by the support of its parent which will maintain adequate liquidity and funds from operations (FFO) to debt in the 12%-20% range.
Last month, BEH successfully placed a seven-year Eurobond issue in the amount of 600 million euro ($703.3 million) and with an annual interest rate of 2.45%. The proceeds raised from the issuance will be used to refinance a 550 million euro bond with 4.875% interest rate issued in 2016 which matures in August 2021, as well as for general corporate purposes, excluding coal-related activities, the company said at the time.
S&P also said in the statement:
"We view NEK as a strategically important subsidiary of BEH, given the former's very important role in Bulgaria's energy system as a hydropower producer and supplier of last resort. Despite improving operating performance, NEK has historically accumulated a lot of debt. It therefore has a significantly higher leverage than BEH. In 2021-2022, we expect NEK's FFO to debt to stay below 12%, versus our estimate of 12%-20% for BEH. Our rating on NEK therefore includes uplift for parent support and is capped one notch below our 'bb-' assessment of the group credit profile.
Nevertheless, NEK's stand-alone credit quality is strengthening. We expect NEK's EBITDA to remain resilient and free operating cash flow (FOCF) to be positive, because the company benefits from ongoing electricity sector liberalization and favorable electricity prices, and its ongoing tariff deficit is covered from Security of Electricity Supply Fund (SESF). Indeed, the company generated EBITDA of BGN249 million in the first half of 2021, compared to BGN237 million BGN191 million for the full years 2020 and 2019, respectively. NEK's 2020 FOCF was also positive, at BGN126 million, thanks to only minimal capex and mostly non-cash interest on related party debt. As a hydropower producer, NEK is well positioned in the energy transition sector and may be eligible for EU grants for green capex, if and when Bulgaria's energy strategy and NEK's specific projects are finalized and obtain all necessary approvals.
We understand that Bulgaria is working to resolve NEK's historical tariff deficit (estimated by World Bank at about BGN1.9 billion), and one of the options under consideration is for SESF to issue debt and transfer the proceeds to NEK. We believe this would be very positive for NEK, but we don't include it in our base case at this stage because it depends on political decisions, market uncertainty and execution, and is unlikely to happen before 2023. Before then, NEK's debt, as adjusted by S&P Global Ratings, remains high, with FFO to debt of 6.4% and debt to EBITDA of 15.3x in 2020. Still, we consider that, of the BGN3.6 billion total adjusted debt at end-2020, only BGN12.7 million were to third parties; the rest was to the Ministry of Energy (BGN1 billion) and to BEH, and these are unlikely to trigger a default, in our view. This leads us to assess NEK's stand-alone credit quality at 'b', up from 'b-' previously.
The outlook is stable. This reflects our expectation that the rating on NEK will continue to depend on BEH's credit quality due to the one-notch differential between the rating and our assessment of NEK's 'b' SACP. We also consider our expectation that BEH's credit metrics will gradually strengthen. After the low 12% FFO to debt in 2020, the ratio will be firmly between 12% and 20% in 2021-2022. We also expect BEH to have sustainable liquidity after the €600 million bond issue in July 2021.
Furthermore, we factor in our assumption that NEK's stand-alone performance will remain robust thanks to resilient EBITDA, ongoing tariff deficit covered from SESF, and positive FOCF. Moreover, we expect NEK's liquidity to stay manageable, with most debt being to the parent and to the government.
Rating upside will be largely driven by a strengthening of the group credit quality beyond our current 'bb-' assessment. This would mainly depend on the combination of:
The group's debt to EBITDA dropping below 4.0x and FFO to debt rising, and staying, above 20%;
Manageable capex plans, with no large new projects to be funded with debt nor or long-term payables (i.e. not covered by equity funding from the government or from EU grants);
Sustainable adequate liquidity at the group level; and
Strengthening management and governance practices, including prudent financial policy and strategy at the group's level.
Additionally, successful implementation of market liberalization in Bulgaria, a resolution of historic tariff deficit and of the loan to the Bulgarian government related to the Belene project would all support an upgrade.
Ratings upside would also hinge on NEK's SACP improving by at least two notches to 'bb-'. We believe such a significant movement would likely take time and could be driven by strengthening business and a reduction in debt, such as through resolution of historical tariff deficit or of the loans from the parent and the government.
We believe that, after BEH has completed its refinancing and most part of its sizable Balkan Stream project, the possibility of a negative rating action on NEK, or a downward revision of the group credit profile, is limited. It could materialize if BEH's FFO to debt declines sustainably below 12%, which could happen due to a very material deterioration in operating performance, large and unexpected debt-funded capex projects, or weakening liquidity. None of these scenarios are part of our base case.
Rating pressure could also stem from a sovereign downgrade by at least two notches. Furthermore, we could downgrade NEK if we saw a pronounced deterioration in its liquidity and ability to generate sufficient cash flow to repay its relatively modest external debt, or if parental support significantly diminishes. However, these developments are also far from our base-case scenario,"
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