TEXT-Fitch downgrades URENCO to 'A-'
Nov 12 - Fitch Ratings has downgraded URENCO Limited's Long-term Issuer Default Rating (IDR) and senior unsecured rating to 'A-' from 'A' and its Short-term IDR to 'F2' from 'F1'. The Outlook on the Long-term IDR is Stable. The agency has also downgraded URENCO Finance N.V.'s Euro Medium Term Note (EMTN) programme and senior unsecured issues under this programme to 'A-' from 'A'. The downgrade reflects Fitch's expectations that URENCO's leverage-related metrics will remain well above 3x in 2012-14, due to the anticipated step-up in dividend payments and despite moderation of its capex programme after 2013. As a result, URENCO's ability to reduce its gross adjusted leverage to 2.5x, which was previously communicated by Fitch as the leverage level commensurate with the 'A' rating, will be further delayed to beyond Fitch's rating horizon. After modest dividend payments in 2009-2011 introduced to accommodate its investment needs, Fitch expects the group to pursue a more aggressive dividend policy in the medium-term. Fitch believes that such shareholder friendly actions are more likely in the future in light of the attempts of some shareholders to dispose of their stakes in URENCO. This, in Fitch's view, is likely to offset a positive impact on the group's credit metrics from some moderation of its capex programme after 2013 as a result of its planned reduction due to market conditions and as the company's ambitious capacity expansion plans will be reaching their peak. However, Fitch believes that the company will still maintain a solid financial profile and will remain well placed compared with its direct uranium enrichment peers and other companies involved in the nuclear fuel cycle. Fitch does not expect the change in German and Japanese nuclear policies on their own to have a material impact on URENCO's credit metrics. While Germany's decision to achieve a gradual phase out of its nuclear power plants by 2022 establishes a more imminent time horizon and arguably more certain framework, the Japanese intention to phase out its nuclear power by 2040 provides for a longer timeframe, which increases the uncertainty of its implementation. URENCO's exposure to the Japanese and German markets is limited, accounting for less than 7% of the order book between them. In response to slower than expected demand in Japan, the company plans to reduce its capacity expansion over 2012-22. As a result, the company plans to invest about EUR2.7bn over 2012-16. As stated in Fitch's previous reports, URENCO's capex programme entails a great degree of flexibility as it is mostly expansion-related with maintenance capex accounting for about EUR40m-EUR50m per annum. In addition, the centrifuge technology used by the group does not only have an energy efficiency advantage but can also be deployed in a modular fashion, enabling gradual ramp-up of production and demand-driven output adjustments. Although Fitch believes that the imminent direct impact of the recent nuclear stance in Japan and Germany on the company's credit metrics is likely to be limited, the longer term implications of these changes may be more substantial and long lasting. In this case Fitch may re-assess its view of URENCO's business profile, which is currently perceived by the agency to be solid. URENCO's ratings continue to benefit from its strong market position in uranium enrichment, large order book and diversified operations. Fitch believes that the company is better positioned than its peers to grow its market share in the medium-term. The ratings are underpinned by the fact that most of its capacity (96%-100%) over 2012-2016 is contracted under long-term contracts with an average duration of 10 years and at fixed prices with an escalation element. This should contribute to the stability and visibility of the company's revenue and cash flow generation. Fitch views URENCO's liquidity as adequate. The company's cash position of EUR12m at end-H112 along with EUR665m of committed credit lines as of November 2012 due in 2016 was well in excess of short-term debt of EUR260.5m at end-H112. Its debt repayment schedule is not onerous until 2015, but Fitch expects URENCO's free cash flow to be negative in 2012 and 2013. WHAT COULD TRIGGER A RATING ACTION? Negative: Future developments that may, individually or collectively, lead to negative rating action include: - Further material deterioration of the credit metrics on a sustained basis (e.g. net funds from operations (FFO) adjusted leverage above 3.75x and FFO fixed charge coverage below 4.0x) due, for example, to high dividends, less favourable demand for uranium enrichment services and/or an intensive capex programme. Positive: Future developments that may, individually or collectively, lead to positive rating action include: - Successful implementation of the capex expansion programme, with subsequent de-leveraging (e.g. net FFO adjusted leverage below 3.0x). Additional information is available at www.fitchratings.com. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings. Applicable criteria, 'Corporate Rating Methodology', dated 8 August 2012, are available at www.fitchratings.com. Applicable Criteria and Related Research: Corporate Rating Methodology