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Rating Action:

Moody's assigns definitive Ba2 rating to Holding Slovenske elektrarne d.o.o.; outlook stable

21 Dec 2016

London, 21 December 2016 -- Moody's Investors Service (Moody's) has today assigned a definitive Ba2 long-term corporate family rating (CFR) and a first-time probability of default rating of Ba2-PD to Holding Slovenske elektrarne d.o.o. (HSE). The outlook on all ratings is stable.

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

The rating action follows HSE's signing of a Term Loan Facility of €180 million, and a Revolving Credit Facility (RCF) of €40 million on 20 December 2016, with an international consortium of five and three banks respectively. These facilities should allow HSE to complete the refinancing of its €215 million Bridge Facility and provide additional liquidity for operational needs. Moody's had assigned a provisional (P)Ba2 CFR on 3 March 2016 predicated on the assumption that HSE would take the necessary steps to address its 2016 debt maturities in a timely fashion. This medium-term refinancing concludes this exercise.

HSE's Ba2 CFR is supported by (1) its dominant market position as the largest power generator in Slovenia, (2) the higher power prices in Slovenia than other major European markets such as Germany given the dynamics of the regional power markets to which Slovenia is linked, and (3) a high probability that HSE's 100% owner, the Republic of Slovenia (Baa3 positive), would step in on a timely basis to avoid a payment default of HSE if this became necessary.

The rating is constrained by the following factors: (1) the relatively small size of the company's generation portfolio in the context of the wider European power markets and its lack of retail customer base, (2) its mix of fairly volatile hydro generation, and lignite-based generation whose profitability is challenged in current market conditions, and (3) its high, but reducing, leverage.

The new loan agreements conclude a broader refinancing exercise initiated in late 2015 in relation to the newly constructed 600 megawatt block at the lignite-fired Sostanj power plant (TES Unit 6). Starting from 2016, the company should be free cash flow positive, given the expected reduction in capital expenditure after completion of its major investment programme. Cash flow generation should be further supported by an improved efficiency of HSE's thermal generation assets, following the commissioning of TES Unit 6 in mid-2015, as well as the implementation of cost optimisation measures across the group. The above developments, combined with scheduled debt repayments and restrictions on dividend payments, should result in a gradual deleveraging of HSE's balance sheet. We expect the company's adjusted net debt/EBITDA ratio to decrease from a high of 9.0x at 31 December 2015 to some 6.0x at end-2016. Nonetheless, HSE will need to continue to deleverage, in line with its stated strategy, in order to comply with increasingly tight covenants in its bank loan documentation over forthcoming years.

HSE's rating incorporates three notches of uplift from its baseline credit assessment (BCA) of 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 €440 million EIB loan, (2) issuance of a comfort letter confirming HSE's strategic role in Slovenia's economy, and (3) HSE's designation as a "strategic asset" in the government's Ordinance on the Management Strategy of State Capital Investments, which minimises the likelihood of any potential privatisation plans.

RATIONALE FOR THE STABLE OUTLOOK

The rating outlook is stable reflecting Moody's expectation that HSE will be able to maintain a financial profile in line with guidance for the current rating of funds from operations (FFO)/debt of at least high single digits in percentage terms, due to a reduced investment programme and lack of shareholder distributions.

WHAT COULD CHANGE THE RATING UP/DOWN

The rating could come under positive pressure if the company were able to demonstrate an improved operating and cash flow profile, as evidenced by FFO/debt comfortably above 10% on a sustained basis. This could be achieved by significant progress in the deleveraging of HSE's balance sheet, potentially supported by a marked improvement in results from thermal generation.

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

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

Headquartered in Ljubljana, Slovenia, HSE is the largest power generation in the country (the so-called "first pillar" of domestic electricity production). Its total installed capacity as of end-2015 amounted to around 2.2 gigawatts, which represented around 60% of the total installed generation capacity in Slovenia. HSE's generation base comprises various run-of-river hydro-power plants, one pump-storage plant, as well as lignite-fired thermal power plants. In addition, HSE owns and operates a lignite mine, which covers all of the group's thermal generation needs. The company is 100% owned by the government of Slovenia.

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.

Helen Francis
Vice President - Senior 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

No Related Data.
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