"At the same time, the local currency (LC) corporate rating was affirmed at 'BBB-'. The outlook on both ratings is negative," S&P said in a statement.
"The rating action on Transgaz follows the downgrade of the sovereign ratings on the Republic of Romania on the back of mounting risks to Romania's real economy due to rising private sector leverage and dependency on uncertain external financing," S&P credit analyst Tania Tsoneva said.
The agency's assessment of Transgaz does not incorporate any explicit state support into the ratings, which are not directly linked to the ratings on Romania (foreign currency BB+/Negative/B; local currency BBB-/Negative/A-3).
"Still, we recognize the company's monopoly status in Romania and its strategic importance within the energy sector as the country's natural gas transmission system operator," the agency said.
The ratings on Transgaz continue to be underpinned by the sole licensed status of the operator, the predictable cash flows generated from regulated transmission activities, and the company's strong financial profile. These strengths are offset by an outdated asset base, which requires continuous investment; remaining transition-economy features; and worsening macroeconomic conditions in Romania, S&P said.
According to the rating agency, Transgaz's creditworthiness may weaken if Romania's macroeconomic environment further worsens on the back of the government's continued expansionary fiscal policy, "but the company is relatively well positioned to withstand macroeconomic shocks compared with companies in other sectors due to its regulated monopoly status."
"Nevertheless, Transgaz's cash flow generation and debt protection measures may be substantially affected by higher-than-expected inflation that is not recovered in full or on a timely basis through tariff increases, worsening payment collection, or higher dividend distribution."
The regulatory framework is generally supportive in insulating Transgaz from market and inflation risks and provides visibility over a five-year period, the current one of which ends June 30, 2012. Yet, Transgaz has some exposure to remaining transition-economy features such as late payments, which may rise on the back of the economic deterioration in Romania.
"In addition, the company's credit quality might be affected by its exposure to financial risks in light of the approved-by-law dividend policy and below-average financial risk management practices. This is mitigated by a strong capital structure with currently low debt levels, with debt to equity of 7.7%," the agency said in its statement.
Although transit revenues provide a natural hedge to the loan repayments denominated in foreign currency, this advantage is to expire soon as the bulk of contracted investment loans should be repaid by 2010. The company has not entered into any interest rate or foreign currency hedges, S&P pointed out.
A large portion of Transgaz's debt (about 70% at Dec. 31, 2007) benefits from letters of comfort issued by the Ministry of Economy and Finance.
Factors that could put pressure on the ratings include the possibility of further adverse macroeconomic developments, an inability to execute or a delay to the mandatory investment program and/or material overruns in capital expenditure or operating costs. The ratings could also come under pressure if the state fails to support Transgaz's investment in the Nabucco pipeline or if the project's financing arrangements, once known, substantially impair the company's financial risk profile.
To maintain the ratings, Standard & Poor's expect Transgaz to sustain low debt leverage and solid cash flow protection measures. A negative change to the sovereign ratings would, in all likelihood, lead to a downward revision of the ratings on Transgaz.
"Conversely, we would expect to revise the outlook to stable if the ratings or outlook on the sovereign improves. Nevertheless, the ratings on Transgaz do not incorporate any explicit state support and are not directly linked to the sovereign ratings."
Transgaz (www.transgaz.ro) is a component of the blue-chip index of the Bucharest bourse. Its shares last traded up 3.06% at 118 lei ($42.6/32.5 euro) by 1430 GMT on Thursday. It is 75% state-owned.
(1 euro = 3.6272 Romanian lei)
