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
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
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