SOFIA (Bulgaria), March 28 (SeeNews) – Standard & Poor's said on Thursday it kept its BB- long-term corporate credit rating on Bulgarian state-owned electricity utility NEK on CreditWatch Negative, where it was placed on December 20, 2012.
NEK is a subsidiary of the state-owned Bulgarian Energy Holding (BEH).
The ongoing CreditWatch placement reflects S&P view of the risk associated with the refinancing of NEK's 195 million euro ($250.2 million) syndicated loan, which matures in May 2013 after NEK extended it for a year, the rating agency said in a statement.
S&P also said in the statement:
“We understand that BEH has received a number of committed offers for its two alternative proposals to raise €250 million either in the form of bonds (with a bridge loan) or a bank loan. BEH aims to receive the funds before the maturity of NEK's €195 million syndicated loan and Bulgarian lev (BGN) 70 million (€35 million) shareholder loan in May 2013. Although we believe that BEH has taken steps to reduce the high degree of refinancing risk, we still see some remaining execution risk while BEH selects the winning bid and completes the contractual arrangements.
We also see continuing uncertainties as to NEK's financial structure as a result of the ongoing transfer of its monopoly electricity system operator, ESO EAD, to BEH. Maintenance of the current rating on NEK, in our view, would require NEK to deleverage its balance sheet. It could achieve this either by allocating some of its debt to ESO, or by repaying debt using any potential funds it receives for the transfer of ESO's ownership to BEH to offset the loss of ESO's relatively stable regulated cash flows. Such actions, if sufficient to reduce debt materially, could support an upward revision of our assessment of NEK's financial risk profile to "aggressive" from "highly leveraged" currently, particularly if these actions coincide with NEK finding a permanent refinancing solution for its syndicated loan.
We apply our criteria for rating parents and their subsidiaries to NEK and add two notches of parental support to NEK's stand-alone credit profile (SACP) of 'b'. The uplift reflects BEH's stronger credit quality than that of NEK due to BEH's stronger business risk position and cash flow generation, as well as its positive discretionary cash flows and significant cash holdings. The uplift also reflects our anticipation that BEH will provide timely and full support in case of NEK's financial distress. This is because we assess the link between BEH and NEK as relatively close, since NEK is a fully controlled, strategic subsidiary within the BEH group. At the same time, we understand that NEK retains its own identity, management, financing, and operational independence.
The CreditWatch placement reflects our view of the uncertainties over the timing of BEH's refinancing plan. We aim to resolve the CreditWatch before NEK's syndicated loan falls due in May 2013.
We could revise NEK's SACP by multiple notches if the refinancing plan is not substantially executed by the end of April 2013. In accordance with our criteria for rating parents and their subsidiaries, a downward revision of NEK's SACP would result in us lowering the long-term corporate credit rating on NEK to the same extent. In addition, we could revise our rating approach of adding to the SACP two notches for parent support if we perceive that full and timely liquidity support to NEK is not forthcoming from BEH in case of delays or obstructions to its refinancing plan.
We could remove the rating from CreditWatch and affirm it once the syndicated loan is fully refinanced with a permanent and sustainable solution. However, in this case, we would likely assign a negative outlook to the rating to reflect the risk related to NEK's financial structure following the transfer of ESO.
We could revise NEK's SACP downward by one notch once the transfer is complete if NEK's balance sheet deleveraging does not occur, or does not sufficiently offset the loss of ESO's stable regulated cash flows. Conversely, we would likely affirm the SACP if NEK's financial structure after the unbundling of ESO improves NEK's financial risk profile to "aggressive" from "highly leveraged" currently. This could result from meaningful balance sheet deleveraging, either by allocating some of NEK's debt to ESO, and/or by using any potential funds that NEK receives for the transfer of ESO's ownership.
In addition, any evidence of weakening of the link between BEH and NEK could cause us to revisit our approach of factoring parent support into the rating.”
($ = 0.7794 euro)