The credit rating also lowered its assessment of NEK's stand-alone credit profile (SACP) to 'ccc+' from 'b-'.
The CreditWatch placement reflects uncertainties about NEK's earnings recovery, as well as whether its parent, BEH, will continue its support going forward, S&P said in a statement.
NEK continues to report losses in 2014, and this is expected to continue into 2015, unless NEK renegotiates its purchase power agreements, the credit agency noted.
S&P also said in the statement:
“We have lowered our assessment of NEK's SACP to 'ccc+' to reflect that NEK's liquidity position has significantly deteriorated following mounting losses. We believe that NEK's capacity to honor its financial obligations in a timely manner primarily depends on the willingness and capacity of its parent BEH to provide timely financial support. In our view, NEK's financial prospects have worsened; the company continued to incur losses through the third quarter of 2014, despite the successive rounds of tariff increases in 2014 by a total of about 25%. These losses are mainly due to NEK's inability to fully recover its disbursements for preferential subsidies to renewable and combined heat and power generators (CHP). As a consequence, BEH has had to support NEK with shareholder loans to cover NEK's immediate cash flow deficits and liquidity needs.
Our 'ccc+' SACP reflects significant hurdles that NEK must overcome in order to regain profitability and be able to service its debt on a sustainable basis. Our forecasts include subdued growth and low deflators in Bulgaria and the following factors, which are specific to NEK:
We anticipate that NEK's losses will persist in 2015, although at a lower rate than 2014 considering the tariff hikes, as well as some incremental profits from the balancing market where NEK sells electricity to cover the system deficit. We understand that NEK is in the process of renegotiating its purchase power agreements in order to lower its legacy cost base. In our forecast, we treat the shareholder loans from BEH (Bulgarian lev [BGN] 1.2 billion at Dec. 31, 2013) as debt because of their short maturity (which has been extended to 10 years), mostly amortizing terms, and an absence of option to defer interest. Nevertheless, we recognize that it is provided by what we consider to be a supportive strategic owner.
We continue to anticipate full and timely support from BEH during NEK's financial recovery phase, although this might change if NEK's long-term financial prospects are not sustainable. In line with our group rating methodology, NEK's credit profile is supported by our view of its status within the BEH group as "strategically important." This reflects that 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. We believe our 'bb-' group credit profile for BEH reflects its likelihood to benefit from state support, stronger business risk position, and diversified holdings in the energy sector. In addition, we view BEH's financial risk profile and flexibility as stronger than NEK's, although it has diminished with its €500 million bond, raised in November 2013, and the financial underperformance of some of its subsidiaries.
Our assessment of NEK's 'ccc+' SACP is based on our view of the company's "weak" business risk profile and its "highly leveraged" financial risk profile. We assess NEK's management and governance as "weak" due to its aggressive liquidity management, frequent management turnover, and weak reporting disclosures.
NEK's business risk profile is constrained by the company's meager profitability and regulatory uncertainty owing to annual tariff resets by Bulgaria's State Energy and Water Regulatory Commission. Our assessment of NEK's business risk profile also factors in the uncertainty related to the Belene nuclear power plant project, which we understand is on hold. Any commitment to commence construction, particularly without any direct government support, could alter our view of the company's business and financial risk profiles. These negative factors are partly mitigated by NEK's dominant market position; its strategic importance as provider of an essential public service; and its ownership of mostly all of the low-cost hydro generation assets in Bulgaria. Our view of NEK's financial risk profile reflects its weak credit metrics, "weak" liquidity position, and aggressive financial policies.
We aim to resolve the CreditWatch placement in the next 90 days. During this period, we will discuss with BEH whether the degree of financial commitment and capacity to support NEK will persist in the foreseeable future. Any evidence of weakening financial support from BEH or of the link between it and NEK, or of BEH's ability or willingness to support a weakened NEK, could cause us to revise our view of NEK's group status downward, leading to a lower rating.
Our assessment of NEK's SACP will include a review of its financial plans for 2015. We could lower the SACP assessment, and consequently the rating, if NEK's ability to meet its financial commitments appears more precarious.“
