Aug 02 - Fitch Ratings has downgraded by one notch the ratings of Spanish integrated utilities Iberdrola, S.A., Endesa, S.A., Gas Natural SDG, S.A. and also that of Enel, S.p.A., which has sizeable exposure to Spain through its ownership of Endesa, and their related entities. All ratings are also maintained on Rating Watch Negative (RWN). A full list of rating actions is provided below. Fitch will shortly publish a separate rating action on EDP- Energias de Portugal and its Spanish business Hidroelectrica del Cantabrico.
The rating actions follow Fitch's review of the Spanish utility sector that is suffering from persisting weak fundamentals, a more hostile and uncertain regulatory framework, signs of political intervention and a stressed financial environment caused by the combined effect of pressure on sovereign debt and on the domestic banking sector. All these factors, in Fitch's view, contribute to an increased overall business risk profile for the sector, which also translates into weakened earnings visibility and a possible further deterioration of companies' financial profiles. Critically, utility ratings typically permit higher leverage for a given rating category as recognition of the greater level of predictability of utility cash flows. The erosion of this predictability, as much as the direct financial impact, therefore has a negative impact on the rating calculus. As a result Fitch's view of the companies affected by this rating action is no longer commensurate with an 'A-' rating level, where they were previously placed.
The increasing signs of political interference are partially driven by the government's struggle to eliminate the tariff deficit ahead of its scheduled termination from 2013. The actions implemented so far in order to offset the generation of additional tariff deficits and to repay the outstanding tariff deficit have only been partially sufficient to address the issue. Regulatory changes introduced in April 2012 had only a relatively limited direct financial significance for the companies affected. However, today's rating actions also reflect the uncertainty related to potential further measures that the government is likely to announce shortly and which Fitch anticipates to have a more severe effect on companies' credit profiles. Ongoing delays in the formal announcement of such measures add to the climate of uncertainty.
The rating actions also capture the further delay in the securitisation process of past tariff deficits as the environment of a spiralling public deficit unbalance and domestic banking sector crisis seriously challenges any efforts to reduce the tariff deficit stock. These delays have led the agency to focus on leverage calculations that include the tariff deficit as part of the debt component. Fitch has incorporated no further securitisations in the rating horizon. Given this conservative approach, even the potential for a partial or full write-off of past deficits - still viewed as highly unlikely - would have a neutral financial impact in view of Fitch's calculation of leverage, albeit represent a further step change in the predictability of the regulatory framework more generally. Based on our currently revised projections, which also incorporate some headroom for further adverse regulatory findings in the autumn, the issuers' financial profiles would allow ratings to remain at their new level absent any additional challenges.
The RWN has been maintained given the prolonged opacity on the type of additional measures that may be taken in order to solve the tariff deficit and also reflects the tail risk that a fundamental challenge to the tariff deficit system arises which may exceed even these conservative projections. Once the measures are announced, Fitch will analyse their implications for each issuer to resolve the RWNs, in conjunction with possible adjustments that companies may make to their strategies.
Fitch placed all Spanish utilities on RWN on 3 April 2012 following the announcement of the first set of measures. Enagas (A-/Negative) and Red Electrica (A-/Negative) were also placed on RWN at that time but following Spain's subsequent downgrade by three notches to 'BBB' with a Negative Outlook their ratings are constrained at two notches above the sovereign given their primarily domestic business profile. Fitch does not expect that the new measures will affect the current ratings of Enagas and Red Electrica.
WHAT COULD TRIGGER A RATING ACTION?
All issuers remain on RWN. As a result, Fitch's sensitivities do not currently anticipate developments with a material likelihood, individually or collectively, of leading to a rating upgrade. Future developments that may nonetheless potentially lead to a positive rating action include:
POSITIVE:
- Limited impact of the future regulatory measures and FFO net leverage below 3.5x on a sustained basis and interest coverage above 5.0x in the case of Iberdrola and Enel, both benefiting from a good degree of geographical diversification. For Gas Natural somewhat stronger ratio levels would be required due to its higher exposure to the domestic market.
Future developments that may, individually or collectively, lead to negative pressure on the issuers' ratings include:
NEGATIVE:
- Significant impact of the new regulatory measures leading to a FFO net leverage above 4.5x on a sustained basis and interest coverage below 4.0x in the case of Iberdrola and Enel. For Gas Natural somewhat tighter ratio levels are applicable given its higher exposure to Spain.
