TEXT-S&P cuts Red Electrica ratings to 'BBB-/A-2'
Overview -- We lowered our sovereign ratings on Spain to 'BBB-/A-3' from 'BBB+/A-2' and assigned a negative outlook to the long-term rating on Oct. 10, 2012. -- We consider that Spanish power grid operator Red Electrica (REE) has "high" country risk exposure to Spain, because its revenue base is almost entirely domestic and as we view the utility sector as having high sensitivity to country risk. -- We are lowering our ratings on REE and its affiliated entities to 'BBB/A-2' from 'A-/A-2'. -- The negative outlook on REE reflects that on Spain. Under our criteria, the long-term rating on Spain constrains the ratings on REE, based on our view that REE bears "high" exposure to country risk in Spain. Rating Action On Oct. 15, 2012, Standard & Poor's Ratings Services lowered its long-term and short-term corporate credit ratings on Spanish power grid operator Red Electrica Corporacion S.A. (REE) and affiliated entities to 'BBB/A-2' from 'A-/A-2'. The outlook is negative Rationale Our downgrade of REE follows the lowering of the long- and short-term sovereign ratings on Spain on Oct. 10, 2012, (see "Spain Ratings Lowered To 'BBB-/A-3' On Mounting Economic And Political Risks; Outlook Negative," published on RatingsDirect on the Global Credit Portal). In accordance with our criteria for rating a nonsovereign issuer in the eurozone (European Economic and Monetary Union) above the related sovereign, we have assessed REE as having "high" exposure to domestic country risk, based on our view of the utility sector's "high" sensitivity to country risk and REE's concentration of revenues in Spain. In addition, we classify REE as a government-related entity (GRE). We consider that there's a "moderate" likelihood that the Spanish government would provide timely and sufficient support to REE, if needed, based on our view of REE's "very important" role for and "limited" link with Spain. Given our views of REE's GRE status and its country risk exposure to Spain, the long-term rating on REE is one notch higher than the long-term rating on Spain, which is the maximum rating differential that we can apply REE under our criteria. The one-notch differential is based on our assessment of REE's stand-alone credit profile (SACP) at 'bbb', versus 'a-' previously, which is higher than the sovereign foreign currency long-term rating. We also factor in the government's relatively modest indirect 20% stake in the company, and our opinion that the Spanish government's willingness and ability to impair REE's credit standing in periods of stress is limited. Our 'BBB' long-term rating on REE also factors in our downward revision of the SACP. The SACP reflects our continued view of REE's business risk profile as "strong" and our revised view of its financial risk profile, which we now assess as "significant" versus "intermediate" previously in light of Spain's deteriorating creditworthiness. We consider that that the company's financial risk profile could weaken if Spain's fiscal and economic challenges lead to further tax pressure and adverse changes in the remuneration of its regulated assets. In addition, we believe REE remains exposed to the possible deterioration of the economic environment and funding conditions for Spanish GREs. REE's "strong" business risk profile reflects the group's national strategic importance to Spain's power system, and its monopolistic market position in a supportive regulatory. Our assessment is also underpinned by REE's regulated asset-based revenues that are immune to volume and price risks and partially hedged against inflation and sovereign bond yield increases. Constraints include the lack of visibility on the impact of recently announced regulatory changes and, more generally, the increasingly uncertain regulatory environment linked to the rising political and economic risks in Spain, where the government decides on electricity infrastructure regulation. We base our assessment of REE's financial risk profile as "significant" on the group's large and predictable regulated cash flows, prudent liability management, and our expectation of positive and growing discretionary cash flow on the back of declining capital expenditure (capex). These strengths are partially offset by high debt, potentially increasing working capital volatility, and a moderately aggressive dividend policy. Our opinion that there is a "moderate" likelihood that the Spanish government would provide timely and sufficient extraordinary support to REE in the event of financial distress is based on our assessment of REE's: -- "Very important" role as the sole power transmission system operator in Spain, having strategic importance for the government in implementing energy policies; and -- "Limited" link with the Spanish government, considering its indirect 20% ownership stake in REE. The government postponed the disposal of a 10% stake due to unfavorable market conditions. Liquidity The short-term rating on REE is 'A-2'. We assess REE's liquidity as "strong", as defined in our criteria. Projected sources of funds exceed projected uses by about 1.7x over the next 12 months, and by more than 1x in the subsequent 12 months. We factor into our liquidity assessment, based on our estimates, the following sources at end-June 2012: -- Estimated funds from operations (FFO) of EUR950 million-EUR1 billion for the coming 12 months; -- Cash and equivalents of EUR150 million, plus an additional EUR150 million in proceeds from a recent bond issue; and -- About EUR1.4 billion in available committed credit lines maturing beyond 12 months. These lines included EUR425 million of European Investment Bank (AAA/Negative/A-1+) facilities and a EUR600 million syndicated facility falling due in July 2016. Against these sources, we factor in the following liquidity uses for the coming 12 months: -- Short-term debt maturities of about EUR484 million; -- Our expectations of negative working capital changes of around EUR150 million; -- Our estimate of more than EUR600 million in capital expenditures; and -- Dividend payments of over EUR300 million. Our assessment of REE's liquidity position is further supported by the company's sound bank relationships, prudent financial discipline, and recently proven access to the debt capital markets. It is also supported by the absence of major debt maturities after 2013 until 2016 and our anticipation that REE will post growing positive discretionary cash flow. Outlook The negative outlook on REE mirrors that on Spain. Under our criteria, the long-term rating on Spain constrains the ratings on REE, based on our view that REE bears "high" exposure to country risk in Spain. A downgrade of Spain to 'BB+' or lower would automatically trigger a downgrade of REE by a similar number of notches. In addition, we could downgrade REE if we no longer consider that its ability to service its debt is superior to that of the sovereign. Our current assessment is based on our view of REE's SACP and our belief that Spain's willingness and ability to impair REE's credit standing in periods of stress is limited. We could also lower our rating on REE if it faces unexpected and far-reaching regulation changes that undermine its business or financial risk profile. Ratings stability, all else being equal, is conditional on a revision of the outlook to stable on Spain. Related Criteria And Research -- Spain Ratings Lowered To 'BBB-/A-3' On Mounting Economic And Political Risks; Outlook Negative, Oct. 10, 2012 -- Criteria Methodology: Business Risk/Financial Risk Matrix Expanded, Sept. 18, 2012 -- Credit FAQ: What's Behind Our Rating Actions On Spanish Power Utilities?, April 4, 2012 -- Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011 -- General Criteria: Nonsovereign Ratings That Exceed EMU Sovereign Ratings: Methodology And Assumptions, June 14, 2011 -- Principles Of Credit Ratings, Feb. 16, 2011 -- Rating Government-Related Entities: Methodology And Assumptions, Dec. 9, 2010 -- Stand-Alone Credit Profiles: One Component Of A Rating, Oct. 1, 2010 -- Use Of CreditWatch And Outlooks, Sept. 14, 2009 Ratings List Downgraded; Ratings Affirmed To From Red Electrica Corporacion S.A. Red Electrica de Espana S.A.U. Corporate Credit Rating BBB/Negative/A-2 A-/Negative/A-2 Downgraded To From Red Electrica Financiaciones, SAU Senior Unsecured(1) BBB A- Red Electrica de Espana Finance B.V. Senior Unsecured(1) BBB A- Ratings Affirmed Red Electrica Corporacion S.A. Commercial Paper(2) A-2 Red Electrica Financiaciones, SAU Commercial Paper(1) A-2 (1)Guaranteed by Red Electrica Corporacion S.A. & Red Electrica de Espana S.A.U. (2) Guaranteed by Red Electrica de Espana S.A.U. Complete ratings information is available to subscribers of RatingsDirect on the Global Credit Portal at www.globalcreditportal.com. All ratings affected by this rating action can be found on Standard & Poor's public Web site at www.standardandpoors.com. Use the Ratings search box located in the left column.
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