(Repeat for additional subscribers)
June 7 (The following statement was released by the rating agency)
Fitch Ratings has maintained Slovensky Plynarensky Priemysel a.s.'s (SPP) Long-term foreign and local currency Issuer Default Ratings (IDR) of 'A-' on Rating Watch Negative (RWN). The ratings were placed on RWN on 20 December 2012.
The rating action reflects the continuing potential that SPP will be internally restructured following the ownership change in January 2013. SPP's shareholders consider, as one of several options, a spin-off of the gas supply segment from SPP and additional changes in the internal group structure that could result in SPP holding 51%, instead of 100%, in key cash flow generating subsidiaries (i.e., SPP Distribucia a.s. and eustream a.s.). This may in turn affect SPP's cash flows and credit metrics because we may focus on received dividends rather than consolidated profile. Fitch plans to resolve the RWN once final group structure is determined.
KEY RATING DRIVERS
- Higher Dividends May Be Negative to Rating: Until ownership change, Fitch assumed dividends will be capped at consolidated net profit. SPP currently plans to distribute a dividend of EUR784m annually from 2013 to 2015 and then EUR600m in 2016 and 2017. The dividend payments will initially be largely financed with debt raised at SPP's cash generating subsidiaries. We expect that the consolidated funds from operations (FFO) net adjusted leverage ratio may exceed the 2.5x FFO net adjusted leverage guidance towards the end of the rating horizon under Fitch's assumptions (e.g., decrease in contracted transmission capacity at eustream, acquisition of additional stakes in two majority held subsidiaries). We however expect that this would rather than a downgrade result in a Negative Outlook for SPP's ratings in the absence of the group restructuring uncertainty.
- Internal Leverage Limit: Shareholder's agreement entered into in December 2012 between entities representing Slovak government and Energeticky a Prumyslovy Holding a.s. (EPH) sets a maximum leverage for SPP of 2.5x net debt to EBITDA. Fitch notes that SPP's currently projected consolidated cash flows support the fixed dividend payout described above while keeping net debt to EBITDA below 2.5x. However, a sustained net debt to EBITDA of 2.5x could lead to a downgrade because it implies exceeding our guidance for the current rating.
- Structural Subordination is a Risk: We assume SPP will repay debt at the holding company level in 2013 (EUR385m at end-March 2013) and new financing will be raised by the company's operating subsidiaries. Should SPP remain directly indebted, we would likely view its creditors as structurally subordinated to those of SPP's subsidiaries which could result in a one notch rating downgrade for SPP.
- Strong Networks, Weak Supply: SPP's ratings continue to be supported by regulated and cash generative distribution and transmission income as well as low capex needs. Rating constraints primarily relate to weak financial results of the gas supply segment. Fitch understands that the improved financial performance of gas supply may require renegotiation of contract with OAO Gazprom (BBB/Stable) to minimise the spread between long-term contract and spot gas prices and the negative margin on regulated household tariffs in Slovakia.
At end-March 2013 total debt amounted to EUR385m and was raised at SPP level. In 2013 SPP plans to repay its debt with leverage increased at eustream and SPP Distribucia.
Positive: Future developments that may, individually or collectively, lead to positive rating action (affirmation and removal from RWN) include:
- Current group structure supporting consolidated FFO net adjusted leverage below 2.5x without debt being raised directly by SPP
Negative: Future developments that may, individually or collectively, lead to negative rating action include:
- Changes in ownership of key subsidiaries leading to deconsolidation of subsidiaries' earnings and/or structural subordination of SPP's creditors
- FFO net adjusted leverage above 2.5x on a sustained basis (assuming current group structure).