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Rating Action:

Moody's assigns (P)Ba2 CFR to Holding Slovenske Elektrarne; stable outlook

03 Mar 2016

London, 03 March 2016 -- Moody's Investors Service (Moody's) has today assigned a provisional (P)Ba2 corporate family rating to Holding Slovenske Elektrarne d.o.o. (HSE). This provisional rating is subject to the successful completion of the issuance of new notes as currently contemplated by HSE. The outlook on the rating is stable.

The provisional rating reflects Moody's preliminary credit opinion regarding the capital structure and liquidity position of the company, as well as the key terms of the notes, pending confirmation of final terms of the transaction. Upon completion of the issuance of the new notes and conclusive review of the final documentation, Moody's will assign definitive ratings. A definitive rating may differ from a provisional rating.

A corporate family rating is an opinion of the HSE group's ability to honour its financial obligations and is assigned to HSE as if it had a single class of debt and a single consolidated legal structure.

RATINGS RATIONALE

HSE's provisional (P)Ba2 CFR reflects (1) its dominant market position as the largest power generator in Slovenia, (2) the dynamics of the regional power markets to which Slovenia is linked which has seen, and is expected to see, higher prices than other major European markets such as Germany, and (3) a high probability that HSE's owner the Republic of Slovenia would step in on a timely basis to avoid a payment default of HSE if this became necessary.

Nevertheless HSE's rating is constrained by (1) its relatively small size in the context of the wider European power markets and lack of retail customer base, (2) its mix of relatively volatile hydro generation, and lignite-based generation whose profitability is challenged in current market conditions, (3) its relatively high debt leverage, and (4) the financial covenants in its bank loan documentation, which HSE will need to ensure it manages over the coming years.

HSE's rating incorporates three notches of uplift from its baseline credit assessment (BCA) of (P) b2. The BCA reflects Moody's view of the standalone credit quality of HSE absent any support that may be forthcoming from the Republic of Slovenia to avoid a payment default. The high support assumption embedded in HSE's rating reflects the strategic importance of the group to the state, and is evidenced by a number of factors, which include (1) the provision of a state guarantee of a EUR 440 million EIB loan, (2) issuance of a comfort letter confirming HSE's strategic role in Slovenia's economy, (3) HSE's designation as a "strategic asset" in the government's ordinance on state assets management strategy, which minimises the likelihood of any potential privatisation plans, and (4) a track record of state support in the form of facilitation of the sale of a 35.6% stake in HESS to GEN Energija.

Moody's cautions that HSE's liquidity is weak. The provisional rating is thus based on the assumption that HSE will take the necessary steps to address its 2016 debt maturities, which Moody's estimates at around EUR300 million, in a timely fashion. In this regard the successful issuance of the new notes is key to the assigned rating as it will enable the company to remove near term refinancing risk and create financial flexibility to more comfortably accommodate the current weak commodity price environment.

RATIONALE FOR STABLE OUTLOOK

The rating outlook is stable reflecting Moody's expectation that HSE will be able to maintain a financial profile in line with the current rating, due to a reduced investment programme and lack of shareholder distributions, which could support free cash flow generation enabling the company to gradually deleverage its balance sheet.

WHAT COULD CHANGE THE RATING UP/DOWN

Given the current high debt levels, and the impact of relatively low prices on the profitability of the conventional generation, Moody's does not expect any upwards rating pressures in the near-term. Nevertheless, the rating could see positive pressure if the company was able to demonstrate an improved operating and cash flow profile, as evidenced by funds from operations (FFO)/debt above 10% on a sustained basis. This could be achieved by significant progress in the deleveraging of HSE's balance sheet, and could be additionally supported by a marked improvement in profitability from thermal generation.

The rating could come under downward pressure if (1) HSE was not able to deleverage its balance sheet as anticipated and consequently was unable to meet the financial covenants in its bank loans, or (2) the liquidity profile remained strained and insufficient to support group day-to-day operations, leading to a potential need for further external financing.

PRINCIPAL METHODOLOGY

The methodologies used in this rating were Unregulated Utilities and Unregulated Power Companies published in October 2014, and Government-Related Issuers published in October 2014. Please see the Ratings Methodologies page on www.moodys.com for a copy of these methodologies.

Headquartered in Ljubljana, Slovenia, HSE is the holding company for the incumbent power company in the country. Group activities encompass: electricity generations from hydro and lignite power plants, electricity wholesale and trading, as well as lignite mining for the needs of its thermal power plants. HSE is 100% owned by the Government of Slovenia (Baa3 stable). In the twelve months ended 31 December 2014, HSE generated 8.3 terawatt hours of electricity and EUR1.3 billion in sales revenue.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Rafal Wojtyna
Asst Vice President - Analyst
Infrastructure Finance Group
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Andrew Blease
Associate Managing Director
Infrastructure Finance Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Releasing Office:
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's assigns (P)Ba2 CFR to Holding Slovenske Elektrarne; stable outlook
No Related Data.
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