April 1 (SeeNews) - S&P Global Ratings said on Wednesday it has placed its 'B+' rating on Croatian multi-utility Zagrebacki Holding, ZGH, on credit watch with negative implications as the recent earthquake in the capital Zagreb and the ongoing coronavirus pandemic might limit Zagreb's ability to support it in a timely manner.
"The CreditWatch negative reflects the uncertainty regarding the city's ability to provide timely support to the holding, as well as potential pressures on its liquidity in the near term, which could result in a downgrade," S&P said in a statement.
It added that ZGH's credit quality is closely linked to that of its 100% shareholder, the city of Zagreb, whose rating outlook was revised to negative on March 27 because its financial situation is likely to worsen considerably, hit by the combined effects of the coronavirus outbreak and the recent earthquake.
The 5.3 magnitude earthquake that hit Zagreb in the early hourse of March 22, killed one person and left behind considerable material damage in Croatia's main city.
Here is what else S&P said:
"Currently, our rating on Zagrebacki includes a two-notch uplift reflecting our expectation of very high likelihood of government support. Zagrebacki provides Zagreb with all the essential infrastructure (waste removal and treatment, gas distribution and supply, water treatment and supply, and parking spaces), and is therefore key to Zagreb's strategy and projects implementation. In addition, the links between Zagrebacki Holding and Zagreb are very strong. The city owns 100% of Zagrebacki, approves the group's investment plans, and guarantees the group's long-term debt, even if it doesn't intervene in ZGH's day-to-day business. Still, we note that the holding's activities would likely continue even in a stress-scenario debt restructuring.
Zagrebacki's liquidity and operations could come under additional pressure. We believe that the COVID-19 pandemic and the recent earthquakes could further pressure Zagrebacki's liquidity and leverage, but the impact is yet to be assessed. The company's leverage is already high (expected around 10x at the end of 2019) and it has sizable short-term debt, resulting in our stand-alone credit profile of 'b-'. Although Zagrebacki traditionally has good relationships with local banks and has been able to roll over its short-term debt under normal historical conditions, the sustainability of its liquidity arrangements will be tested in the currently challenging operating and financial environment.
We now expect lower cash flows in 2020 than we had previously forecast, slightly offset by a reduction in capital expenditure. Zagrebacki stopped non-essential operations (parking, markets, bus transportation and so on) solely focusing on gas distribution and supply as well as water and waste treatment and road works. Meanwhile, some of the holding's labor force may not be available to repair assets affected by the earthquake because of social distancing requirements, but we understand from the company that around 80% of employees are still doing their job. We do not rule out working capital outlays if customers' payments are delayed.
It remains to be seen whether the city's support will offset pressures on Zagrebacki's liquidity.
The CreditWatch reflects the potential for a downgrade stemming from a combination of three main factors:
Potential deterioration in Zagreb's credit quality.
A potential change in government if the city's policy priorities shift amid COVID-19 and the recent earthquake. We recognize the essential nature of Zagrebacki's operations for the city, but we believe that its operations could continue even if the company has to restructure its debt--which may reduce the government's incentives to provide timely support.
Ongoing pressures on Zagrebacki's liquidity and stand-alone credit quality.
If we lower our rating on Zagreb by one notch, we would lower our rating on Zagrebacki by at least one notch. If combined, negative developments in several of the above areas could lead to a multi-notch downgrade.
We aim to resolve the CreditWatch within 90 days, and will monitor the company's and city's plans to cope with mounting adversities."