(The following statement was released by the rating agency)
Sept 26 -
Summary analysis — Enemalta Corp. ———————————————— 26-Sep-2012
CREDIT RATING: B+/Negative/— Country: Malta
Primary SIC: Electric Services
Credit Rating History:
Local currency Foreign currency
28-Feb-2012 B+/— B+/—
25-Jan-2011 BB/— BB/—
16-Oct-2009 BB+/— BB+/—
The ‘B+’ rating on Maltese utility Enemalta Corp. primarily reflects Standard & Poor’s Ratings Services’ opinion that there is a “very high” likelihood that the Republic of Malta (A-/Negative/A-2) would provide timely and sufficient extraordinary support to the company in the event of financial distress. We assess Enemalta’s stand-alone credit profile (SACP) at ‘ccc’.
We consider Enemalta to be a government-related entity (GRE), based on our assessment of its “very important” role as the island’s sole power generator and supplier and “very strong” link with the Maltese government, with 100% of its capital, according to our criteria for GREs.
We consider Enemalta’s business risk profile to be “vulnerable,” reflecting its poor profitability, high cost and old generation portfolio based mainly on fuel oil, exposure to oil prices, and lack of timely cost-reflective adjustments in the tariffs it is allowed to charge consumers. The tariffs weigh significantly on our view of the company’s credit profile, especially in the current high oil price environment.
The SACP is also constrained by our view of Enemalta’s “highly leveraged” financial risk profile, based on weak and volatile credit metrics and ongoing negative free cash flow, or funds from operations (FFO) after capital expenditure (capex). We believe Enemalta will post losses in 2012 linked to its exposure to oil-based commodities.
S&P base-case operating scenario
We had expected the refinancing of the current portion of Enemalta’s debt to be executed in the first half of 2012. But we now understand the Maltese parliament has not yet initiated the debate on setting up the proposed special purpose vehicle that we believe is instrumental to completing the transaction. As a consequence, we now expect the transaction to be executed by the end of 2012 as any further delay would suggest, in our opinion, that the government is struggling to address the much-needed financial restructuring of the company. Although we acknowledge that the government intends to assume a share of Enemalta’s 2012 costs in the state budget, we believe this will only serve as a temporary solution and not properly address the restoration of the company’s profitability. In addition, given the already high energy costs in Malta, we think that any move towards a cost reflective tariff could be considered a risk for the local economy.
S&P base-case cash flow and capital-structure scenario
Our base-case scenario forecasts that Enemalta will post losses of around EUR60 million in 2012, based on a double-digit year-on-year increase in the cost of oil-based commodities, which we believe the company is not allowed to pass on to consumers. We project, however, that the government will assume about EUR25 million of Enemalta’s 2012 costs, which will bring the loss down to EUR35 million. Nevertheless, we anticipate that Enemalta will continue to post negative free cash flow after capex in 2012 and beyond, unless cost-reflective tariffs are unexpectedly introduced.
We assess Enemalta’s stand-alone liquidity as “less than adequate” under our criteria, in spite of our expectation that its available cash resources will be insufficient to meet liquidity uses over the next 12 months. This is owing to our expectation of full and timely government support to fill any liquidity gaps that might arise.
As of June 2012, we calculated the following liquidity uses for the next 12 months:
— Approximately EUR95 million in capex; and
— EUR183.3 million of contractual debt amortization.
Over the same period, we estimate that sources of liquidity will include:
— FFO of EUR27 million; and
— Two bank loans worth EUR150 million.
The significant delay in refinancing outstanding debt and the lack of visibility on the timing of the possible execution have led Enemalta to roll over its existing debt and extend its bank overdraft facilities.
We believe that Enemalta will continue to discuss extending current and medium-term debt maturities with its main bank counterparties, and therefore reduce refinancing risk over the next few years. We will monitor the terms of any renegotiation or extension of debt to ascertain that creditors do not receive less than the original promise, are adequately compensated, and voluntarily enter into the extension. We will then determine whether we should treat a possible exchange offer as tantamount to a default under our criteria. We do not, however, factor such a scenario into our current rating on Enemalta.
The negative outlook reflects our view that any further deterioration of Enemalta’s SACP may signal weakening government support and further constrain the ratings. Although a downward revision of Enemalta’s SACP will not be likely to lead to a negative rating action under our criteria, a revision of our assessment of likely GRE support to “high” from “very high” would trigger a one-notch downgrade of Enemalta. This could occur if the debt refinancing transaction was not completed by the end of this year because timeliness is an important aspect of our assessment, along with capacity and willingness of support. We also believe that, in light of the challenging economic environment, the government may assign lower priority to providing Enemalta with timely and financial support in case of stress. Furthermore, the continued delays in refinancing outstanding debt, in our view, constrain the company’s financial risk profile, which we already assess as highly leveraged. All these factors could lead us to lower our rating on Enemalta.
We might revise the outlook to stable if Enemalta successfully improved its profitability, which would largely be a result of electricity tariff increases or lower input costs—especially for oil—and if it refinanced its outstanding debt. These factors depend on ongoing support from the government.
We might raise our assessment of Enemalta’s SACP if the government and the regulator allowed structural changes to Enemalta’s tariff structure, allowing it to pass on rising fuel costs to customers and modernize its inefficient generation fleet.
Related Criteria And Research
— How Standard & Poor’s Uses Its ‘CCC’ Rating, Dec. 12, 2008
— Rating Government-Related Entities: Methodology And Assumptions, Dec. 9, 2010
— Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011
— Stand-Alone Credit Profiles: One Component Of A Rating, Oct. 1, 2010
— Use Of CreditWatch And Outlooks, Sept. 14, 2009
— Criteria Methodology: Business Risk/Financial Risk Matrix Expanded, May 27, 2009
— Principles Of Credit Ratings, Feb. 16, 2011
— Maltese Utility Enemalta Corp. Downgraded to ‘B+’ on weakening SACP and delayed debt restructuring, Feb 28, 2012