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Rating Action:

MOODY'S UPGRADES TO Aaa FROM Aa3 THE LONG TERM RATING OF LANDSVIRKJUN

31 Oct 2002
MOODY'S UPGRADES TO Aaa FROM Aa3 THE LONG TERM RATING OF LANDSVIRKJUN

Approximately $980.5 Million of Debt Securities Affected.

London, 31 October 2002 -- Moody's Investors Service has upgraded to Aaa from Aa3 the long term senior unsecured foreign currency rating of Landsvirkjun's USD1 billion EMTN programme. This follows the recent upgrade of Iceland's foreign currency rating to Aaa from Aa3 on 20 October 2002, to be in line with its domestic currency rating. The upgrade reflects the support provided by the Republic of Iceland to the company under its guarantee of collection.

Landsvirkjun operates as a partnership and Notes issued under the EMTN programme benefit from a joint and several guarantee of collection provided by its owners, the Republic of Iceland (50%), the City of Reykyavik (45%) and the Township of Akureyri (5%), notes Moody's. According to the rating agency, guarantees of collection, which are common in the Nordic Region, do not offer bondholders the same degree of protection as a standard guarantee. There is a potential risk of non-timely repayment should the company fail to meet its obligations, as exhaustive administrative and legal procedures must be followed before the shareholders are obliged to pay. However, given the vital strategic importance of the company and other incentives for the shareholders (such as its liability for penalty interest), Moody's expects that the State and the other shareholders would intervene in a timely fashion to provide financial or other assistance before the point was reached for the guarantee to be called.

Landsvirkjun owns the transmission grid in Iceland. Additionally it provides around 85% of Iceland's electricity with some two thirds of its production used by power-intensive aluminium smelting industrial companies. The company has historically had a weak financial profile, given high leverage and moderate profitability. Landsvirkjun is also exposed to currency and commodity price fluctuations but uses hedging techniques to help mitigate this exposure. Moody's expects the company's stand-alone financial position may be weakened further if the proposed Act to allow liberalisation of the sector is passed, thus permitting competition to be developed in Iceland, although given the barriers to entry in this small isolated market, significant competition may well not materialise. If the new Act goes ahead, then the company may be restructured to allow for the establishment of a separate company for the transmission assets, although Landsvirkjun would remain the principal owner. Recent discussions to incorporate the company or possibly change the ownership structure seem to have receded for the time being, however should such a change occur, existing liabilities would still be enforceable against the current owners and it is anticipated that the State would maintain a 50% stake, says Moody's.

Moody's notes that the government, Landsvirkjun and Alcoa have recently entered into a memorandum of understanding that contemplates the construction of an additional power plant and aluminium smelter. If this project goes ahead, it will entail significant additional investments on Landsvirkjun's behalf, which could significantly weaken Landsvirkjun's financial position in the early years of the project. This project nonetheless has the support of the government, although there has been some environmental opposition. Moody's believes such a project would be strategically important to Iceland, and would be expected to be an important contributor to the growth of the economy. Moody's would nonetheless expect that Landsvirkjun would put in place appropriate funding structures and liquidity measures to ensure the economic viability of any such project, and notes that failure to do so may impact the rating.

Landsvirkjun is headquartered in Reykyavik, Iceland and generates, transmits and sells electricity to local public utilities and energy-intensive industries. As at FYE 2001, it had a turnover of Eur140 million.

London
Stuart Lawton
Managing Director
European Corporates
Moody's Investors Service Ltd.
44 20 7772 5454

London
Helen Francis
Vice President - Senior Analyst
European Corporates
Moody's Investors Service Ltd.
44 20 7772 5454

No Related Data.
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