(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
-- 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
Related Criteria And Research
-- How Standard & Poor's Uses Its 'CCC' Rating, Dec. 12, 2008
-- Rating Government-Related Entities: Methodology And Assumptions, Dec.
-- 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