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