November 13, 2012 / 8:26 PM / 5 years ago

TEXT - S&P may cut Israel Electric ratings

11 Min Read

     -- Israel electric monopoly Israel Electric Corp. Ltd. (IEC) faces 
renewed liquidity pressure due to another increase in fuel costs resulting 
from the stoppage of natural gas from Egypt, which is forcing the company to 
procure more expensive fuels.
     -- The Israeli government is increasing debt guarantees by new Israeli 
shekel (NIS) 1 billion, and has approved the issuance of NIS3 billion in 
non-guaranteed debt, that it believes will together cover IEC's funding needs 
until at least the end of February 2013.
     -- We believe that the government continues to fully stand behind IEC in 
relation to the company's fuel costs, but that the liquidity support plan 
entails execution risk.
     -- We are placing our 'BB+' long-term foreign currency corporate credit 
rating on CreditWatch with negative implications.
     -- The CreditWatch negative placement reflects our opinion that there is 
the risk of a multi-notch downgrade of IEC if the planned liquidity support 
measures are not implemented in a full and timely manner.

Rating Action
On Nov. 13, 2012, Standard & Poor's Ratings Services placed its 'BB+' 
long-term corporate credit and senior secured debt ratings on Israel's 
electricity monopoly, Israel Electric Corp. Ltd. (IEC), on CreditWatch with 
negative implications.

The CreditWatch placement reflects our view that IEC's liquidity, which we 
already define as "weak" (as per our criteria) on a stand-alone basis, is 
again under stress due to an unexpected increase in fuel costs for the 
remainder of 2012. IEC's liquidity has been under pressure for more than a 
year due to the fuel crisis, which was caused by the disruption of natural gas 
supplies from Egypt and the unexpected rapid depletion of reserves from the 
domestic Yam Tethys field. The disruption has caused IEC to procure more 
expensive fuels to run its power plants, straining its liquidity position 
until the rising costs are compensated for by an increase in tariffs. We 
anticipate that this situation will persist until the connection to the 
offshore Tamar gas field has been completed, which we currently expect will be 
in early-June 2013.

We understand that IEC and the government have agreed on the following 
measures to strengthen IEC's liquidity in the near and medium term:
     -- Issuance of an additional new Israeli shekel (NIS) 1 billion of 
government guarantees to support debt-raising to cover the unexpected increase 
in fuel costs for the rest of 2012;
     -- Issuance of an additional NIS3 billion in unguaranteed debt that, in 
combination with the guaranteed debt, will cover IEC's funding needs until at 
least the end of February 2013;
     -- Strengthening of IEC's liquidity cushion to at least NIS2 billion by 
June 2013, to be achieved mainly through the NIS3 billion unguaranteed 
issuance; and
     -- Agreement, in principle, by the government to provide an additional 
NIS2 billion in debt guarantees for 2013 to cover any additional funding 
shortfalls due to fuel costs, should these arise.

That said, the CreditWatch listing reflects our opinion that there is 
execution risk to this liquidity plan in the near term. We anticipate that the 
NIS 1 billion in new guarantees will be approved by parliament imminently, but 
that the NIS3 billion in unguaranteed debt has not yet been secured. Even if 
the full NIS3 billion is raised in the coming days or weeks, we remain 
cautious about IEC's ability to sustainably stabilize and strengthen its 
liquidity cushion, especially given the company's recent track record of cash 
flow forecasting in relation to the fuel crisis.

We consider that the government fully stands behind IEC in relation to the 
fuel crisis, but that it has provided support through guarantees relatively 
late in the process and on ad hoc basis thus far. We also consider that the 
government's oversight of IEC's liquidity position and cash flow forecasting 
has been weak, contributing to its reactive and ad hoc approach. We understand 
from discussions with the government that it is putting in place a range of 
measures aimed at immediately strengthening its oversight of IEC's liquidity 
management, and ensuring it has the ability to provide more proactive support 
in the future, if needed.

The ratings on IEC reflect the company's stand-alone credit profile (SACP), 
that we assess as 'b-', and our assumption of the likelihood of extraordinary 
government support, that we consider "very high." We view IEC as a 
government-related entity (GRE). In accordance with our criteria for GREs, our 
opinion is that there is a "very high" likelihood that the State of Israel 
(foreign currency A+/Stable/A-1; local currency AA-/Stable/A-1+) would provide 
timely and sufficient extraordinary support to IEC in the event of financial 

We base our assessment on IEC's:
     -- "Very important" role for Israel's economy, given its virtually 
unchallenged monopoly position and ownership of essentially all strategically 
important electricity distribution, transmission, and generation assets in the 
country. We anticipate some new competition in generation by way of 
independent power producers (IPPs), but, in our view, IEC's market share in 
this segment is unlikely to decrease below 80% of Israel's total capacity over 
the medium term.
     -- "Very strong" link with the Israeli state, which owns 99.85% of IEC 
and is actively involved in defining IEC's strategy and approving its 
borrowing plans. We consider that the "very strong" link is being tested in 
the current fuel crisis because the government has provided liquidity support 
to IEC relatively late and on an ad hoc basis. However, we expect that, when 
implemented, recent commitments from the government to strengthen its 
oversight of IEC's liquidity management will give us comfort that the link 
remains "very strong" at this stage.

We assess IEC's liquidity as "less than adequate" under our criteria. We base 
this on what we view as the company's "weak" stand-alone liquidity position, 
combined with our view that the Israeli government has the ability and 
willingness to provide sufficient liquidity support to IEC in a timely manner. 
Recent actions by the government, including the provision of guarantees, 
support this view. However, the government's willingness to continue to 
provide full and timely support will continue to be tested, in our opinion, 
until the fuel crisis has ended and IEC has taken material steps to 
sustainably strengthen its stand-alone liquidity buffer. Our view of IEC's 
"weak" stand-alone liquidity profile is based on the company's immediate 
funding gap, negative free operating cash flow, and the absence of committed 
backup facilities.

Based on current information, if IEC succeeds in issuing NIS3 billion 
unguaranteed bonds this month, it will be funded to the end of February 2013. 
The company faces material debt maturities in 2013 of NIS4.7 billion. We 
anticipate that, to refinance this debt and fund other requirements, IEC will 
need to issue additional debt of about NIS7.4 billion during 2013, of which 
the company currently expects that about NIS3.9 billion will be government 

Standard & Poor's aims to resolve the CreditWatch placement within 90 days. 
During this period, we will assess whether the planned liquidity support 
measures, including the new government guarantees and IEC's unguaranteed bond 
issuance, are implemented in a full and timely manner and result in a 
stabilization of IEC's liquidity that we consider sustainable well into 2013. 
We will also assess whether the government has sufficiently strengthened its 
oversight of IEC's liquidity management, such that we believe a recurrence of 
the current liquidity stress is unlikely.

The ratings could be affirmed if we believe that the recently announced 
liquidity support measures have been completed according to plan, and that the 
government and IEC have agreed on sufficiently robust measures to place IEC's 
liquidity on a sustainably strengthened footing well into 2013. Conversely, 
there could be a multiple-notch downgrade of IEC if the company and the 
government do not implement the recently announced liquidity measures and 
enhanced supervision in a full and timely manner, or if we believe that IEC's 
liquidity management has not been sufficiently strengthened to ensure that the 
current liquidity crisis does not recur. For example, our view of the link 
with the government could weaken and, thereby, so would our view of the 
likelihood of extraordinary support, if we believe that the government has not 
sufficiently strengthened its oversight of IEC's liquidity management, or if 
it does not provide support to IEC on a full and timely basis. Similarly, we 
could lower our 'b-' SACP on IEC if we assess that the imminent funding 
deficit has not been closed as we currently expect, or if the company does not 
implement its planned measures to sustainably strengthen its liquidity cushion 
into 2013.

Related Criteria And Research
All articles listed below are available on RatingsDirect on the Global Credit 
Portal, unless otherwise stated.
6881137&rev_id=1&sid=1002491&sind=A&", Sept. 28, 2011
6348503&rev_id=5&sid=1002491&sind=A&", Dec. 9, 2010
5426464&rev_id=13&sid=1002491&sind=A&", May 27, 2009
5446217&rev_id=4&sid=1002491&sind=A&", April 15, 2008
5446154&rev_id=10&sid=1002491&sind=A&", April 15, 2008

Ratings List

Ratings Affirmed; CreditWatch/Outlook Action
                                        To                 From
Israel Electric Corp. Ltd.
 Corporate Credit Rating
  Foreign Currency                      BB+/Watch Neg/--   BB+/Negative/--
   Senior Secured Debt                  BB+/Watch Neg      BB+

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