TEXT-Fitch affirms HSE Netz ratings

Thu Mar 15, 2012 12:10pm EDT

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(The following statement was released by the rating agency)	
    March 15 - Fitch Ratings has affirmed Germany's HSE Netz AG 	
(HSE Netz) Long-term Issuer Default Rating (IDR) at 'BBB-' with a Stable Outlook	
and senior unsecured rating at 'BBB'.	
	
The affirmation is driven by the company's successful refinancing, completed 	
with a EUR320m placement of 30-year bonds in April 2011. The key credit features	
of the bond issue, including structural enhancements such as debt service 	
reserve liquidity and covenants, were in line with Fitch's expectations at the 	
assignment of the bond's rating.	
	
As a result of the increased debt, HSE Netz's credit metrics are expected to 	
have deteriorated moderately at YE11 but forecast FFO net leverage remains in 	
the range of 6x-7x and interest cover at 2.3x-2.7x (corresponding to a 	
post-maintenance interest coverage ratio (PMICR) around 1.3x-1.6x and regulatory	
gearing of around 60%). 	
	
Some court cases that appealed single aspects of the tariff settlement indicate 	
that there could be positive movements for network companies in the medium term.	
However, at this stage there is little transparency around the possible impact 	
on HSE Netz. Reliable information may only be available following the conclusion	
of the next price control settlements.	
	
The IDR continues to reflect the unchanged combined risk profile of HSE Netz and	
its operating subsidiary Verteilnetzbetreiber (VNB) Rhein-Main-Neckar GmbH & Co.	
KG. This is characterised by its regional monopoly position in electricity and 	
gas distribution, and its defensive qualities, including non-cyclical and 	
inflexible demand. The operating business in FY11 performed in line with 	
expectations. The regulated business activity is based on diversified long-term 	
grid concessions with the renewal risk shifted to 2025-2028 and is mitigated 	
through successful past extensions.	
	
The 'BBB' senior unsecured rating incorporates a one-notch uplift from HSE 	
Netz's IDR, reflecting Fitch's expectation of above-average recovery prospects 	
for debt issued by European regulated utilities.	
	
As HSE Netz does not have any available credit lines, for liquidity the company 	
relies on prudent planning of monthly cash management as part of the ordinary 	
treasury function. At YE11, the company had a cash balance of EUR89.6m but 	
almost the entire amount was held as reserves (EUR16.5m as debt service reserve 	
with the remainder held against contingent liabilities) established in line with	
bond documentation requirements. 	
	
 (Caryn Trokie, New York Ratings Unit)
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