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UPDATE 3-S&P could revise Areva outlook to negative after earnings warning
August 7, 2014 / 7:41 AM / 3 years ago

UPDATE 3-S&P could revise Areva outlook to negative after earnings warning

* Areva’s BBB- long term rating just one notch above junk

* Areva earnings guidance not in line with S&P assumptions

* S&P says short-term nuclear industry outlook challenging

* Sector source says Areva focused on optimising cash flow (Updates with shares closing 3 pct lower at new 12-month low)

By Geert De Clercq

PARIS, Aug 7 (Reuters) - French nuclear group Areva could find its investment grade credit rating under threat after warning of lower sales last week, which upset the assumptions of the only agency that rates its debt.

Areva’s long-term issuer rating from Standard & Poor’s has been at BBB-, just one notch above junk status but with a stable outlook, since December 2011, when it was downgraded two notches from BBB+ after booking a 2.4 billion euro ($3.2 billion) charge for project delays and cancelled orders in the wake of the Fukushima nuclear disaster.

But that stable outlook could be cut to negative after Areva shocked investors on Friday with a 694 million euro loss caused by disappointing nuclear revenue and a writedown on its surprise exit from solar power.

It also cut its revenue forecast and admitted its long-held ambition to sell 10 nuclear reactors by 2016 was no longer achievable. Its shares fell 20 percent on the warning, their worst fall since Areva was formed in 2001.

“The below-expectations results and the downwards revision of its guidance are not in line with our assumptions for the company,” S&P credit analyst Lucas Sevenin told Reuters, adding that S&P would focus on these topics in its discussions with Areva management.

On Thursday, Areva shares closed 3.1 percent lower at a new 12-month low. The CAC 40 index closed 1.4 percent lower.

A downgrade could not only push up its borrowing costs and constrain its access to funding, but could also spark a wave of stock sales as many investment funds are only allowed to hold investment-grade stocks.

An Areva spokesman declined to comment.

At S&P, a stable outlook indicates that there is a less than one-in-three probability of a downgrade or upgrade within the next two years, but a change in its outlook means S&P is likely to change its rating within two years.

In February, Areva stock plunged after the firm posted nearly half a billion euros in losses following writedowns on its Olkiluoto 3 reactor in Finland, whose construction is years behind schedule and billions over budget.

“Currently our assumption is that we are not going to see further major items on Olkiluoto, but it remains an area of risk,” Sevenin said.

The S&P analysts said the outlook for Areva was not very positive in the short term, given the weak demand for nuclear new-build following the Fukushima disaster and the decision of many governments to idle or phase out nuclear reactors.

He added that a major reactor building programme in China would be a positive factor, but not for some time.

“In the long term we expect nuclear capacity to increase, but in the short term we expect the environment to remain challenging,” Sevenin said.

MATURITY CALENDAR

A sector specialist who declined to be identified said Areva was focusing on optimising its cash flow through asset sales and a reduction of its investment budget.

He added that Areva had no major financing needs, with no significant debt repayments due before the second half of 2015, and the company had 2.3 billion euros in net cash available as well as 2 billion euros of back-up credit lines.

“This removes all pressure in case of a short-term need to access the market (for financing),” he said.

Areva’s ability to meet bond maturity deadlines is an important factor in S&P’s outlook review process.

“If there are significant debt maturities and there is no new debt issuance to offset these maturities, this could pressure the liquidity assessment and the rating,” Sevenin said.

Areva has relatively modest debt repayment needs of around 300 million euros this year and next. But it has to reimburse more than 1.2 billion euros in 2016 and more than 800 million euros in 2017.

On June 30, Areva’s net debt had grown to 4.7 billion euros from 4.4 billion at end 2013. Its average debt maturity is 5.8 years.

S&P measures whether for the 12 months from July 1, 2014, the firm’s cash sources are at least 1.5 times its needs, and at least one time for the subsequent 12 months. Beyond that horizon, S&P looks for major debt maturities and the firm’s refinancing ability.

S&P’s standalone rating for Areva is a BB-, deep into junk bond territory. But since the state owns 87 percent of Areva, it assumes France would back Areva in the event of financial distress, for which S&P awards Areva an extra three notches.

The implicit state guarantee does not necessarily protect Areva’s rating from being downgraded into junk status, and Sevenin said that if the company’s standalone rating were to be cut, this would likely lower its overall rating as well.

“Since Areva’s ratings downgrade of December 2011, several industry and company-related negative elements have appeared,” Sevenin said.

$1 = 0.7490 euro Reporting by Geert De Clercq; Editing by Andrew Callus, Will Waterman and David Evans

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