SEPTEMBER 22 2012 12:46h

Moody's downgrades HEP's rating from Ba1 to Ba2

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LONDON/ZAGREB, Sept 21 (Hina) - The Moody's credit rating agency has decided to lower from Ba1 to Ba2 the corporate family rating (CFR) and probability of default rating (PDR) of the Croatian power supplier (HEP), adding that the outlook on the ratings remains negative.

According to the explanation which Moody's Investors Service gave on Friday, "the downgrade reflects the significant pressure on HEP's liquidity arising from the high proportion of short-term debt in the company's total debt burden, the demanding maturity profile of its long-term debt and its need for significant new financing to cover its sizeable investment programme".

Richard Miratsky, a Moody's Vice President - Senior Analyst and lead analyst for HEP - was quoted as saying that they "maintain the negative outlook on HEP's ratings, reflecting the negative rating outlook on the Baa3 local- and foreign-currency government bond ratings of the Government of Croatia, which owns 100% of the company."

"Given its 100% ownership by the Government of Croatia, HEP falls within the scope of Moody's rating methodology for government-related issuers (GRIs). In accordance with the methodology, HEP's Ba2 CFR incorporates a two-notch uplift for potential government support to its standalone credit quality, the later expressed as a baseline credit assessment (BCA) of b1. Any downgrade of the Government of Croatia's rating, which also carries a negative outlook, would also likely result in a downgrade in the rating of HEP," reads thee explanation.

"The b1 BCA (downgraded from ba3) reflects the fact that HEP has utilised all of the headroom under its committed credit lines during 2012, mainly as a result of weakened cash flow generation caused by the continuing drought in Croatia, which has significantly limited the company's utilisation of its hydro-based generation facilities."

"In order to cover the domestic demand for electricity, HEP had to increase its production from thermal power sources and increase imports of electricity, which significantly increased its costs, weakened its cash flow generation and stretched its liquidity. Furthermore, execution of its sizeable investment plan and its significant dividend payout of HRK493 million (EUR65 million) in 2011 further constrained the company's liquidity, which remains highly dependent on unrestricted access to bank financing. This necessitates the continuing renewal of short-term lines and the raising of new funding to cover long-term debt repayments and growing investments."

Given the currently adverse economic environment in Croatia and Europe in general, Moody's believes that HEP will find it challenging to raise the substantial amount of new debt that it needs to fund its upcoming debt maturities and investments, the credit rating agency said, among other things.