London, 19 June 2020 -- Moody's Investors Service, ("Moody's") today
assigned a first time Baa1 long term issuer rating for Danske Commodities
A/S (DC). The rating outlook is negative.
"The assigned Baa1 rating is supported by DC's solid stand-alone
credit profile with a good track record of strong revenue growth and satisfactory
profitability and a lowly leverage balance sheet as well as the company's
100% ownership by Equinor, which has injected $200
million of equity into DC and provides liquidity support," said
Sven Reinke, a Senior Vice President and lead analyst for DC.
RATINGS RATIONALE
The Baa1 rating reflects Danske Commodities A/S' (DC) good track record
of strong revenue growth since it was founded in 2004 and satisfactory
albeit somewhat volatile profitability. DC has a lowly leveraged
balance sheet with no external financial debt and well established risk
management with relatively low risk appetite.
DC's revenues exceeded €10 billion for the first time in 2019,
a more than 20 fold increase over the last ten years. However,
while revenue and trading volume grew substantially, DC's gross
profit grew much slower to €108 million in 2019 from €25 million
in 2010. Accordingly, the company's gross profit margin contracted
from more than 6% in 2010 to around 1% in 2019. The
margin contraction is driven by the increasingly mature European power
and gas trading markets which eliminates larger arbitrage opportunities.
While falling profitability margins are credit negative, Moody's
takes comfort from DC's prudent risk management and does not envisage
that the materially larger revenue and trading volumes have increased
the company's risk appetite substantially. Moody's also believe
that the margin contraction has bottomed out and that future top line
growth will result in a similar increase in gross profit and EBITDA.
Moody's projects DC's revenues and EBITDA to grow by around 10%
annually over the next 2-3 years and does not expect the Coronavirus
crisis to materially impact the company's operations this year.
However growth will likely be more muted in 2020 as DC has reduced trading
volumes with some counterparties deemed higher risk to avoid counterparty
credit losses.
Despite DC's solid credit profile, Moody's would rate
DC on a stand-alone basis only in the high 'Ba' rating category
as the rating agency believes that the company's proprietary power and
gas trading carries a relatively high business risk. The rating
also incorporates the 100% ownership by Equinor ASA (Equinor,
Aa2 negative), DC's strategic importance for Equinor, substantial
parent oversight and financial support by Equinor. Equinor has
not only invested €400 million to acquire DC in 2019 but also injected
additional $200 million of equity into DC and provides substantial
liquidity support by providing a €500 million credit facility and
by guaranteeing additional trade finance facilities.
Equinor acquired DC to strengthen its ability to capture value from its
own production of renewable power. DC is Equinor's power
and third party gas trading arm and shall be its route-to market
for the renewable power generation. In 2019 DC signed offtake/long-term
balancing Purchase Power Agreements for three wind farms in the UK operated
by Equinor. As a result, DC is the exclusive offtaker and
trader of production from these assets on behalf of Equinor with a mandate
to optimize the monetization of its parent's electricity share of
production.
Nevertheless, Moody's does not consider DC's credit quality
to be fully aligned with Equinor's. DC keeps a certain level of
independence in particular as it continues to operate its core propriety
power and gas trading business. Equinor does not provide a blanket
guarantee for DC's financial obligations.
LIQUIDITY
DC has a good liquidity position, supported by cash and cash equivalents
of €61 million at the end of 2019 as well as a €500 million`committed
RCF provided by Equinor of which €395 million are currently undrawn.
The RCF, which can be used to finance working capital, matures
in September 2020 but Moody's understands that an extension of the
facility has already been approved internally by Equinor. With
no external debt which needs to be repaid at some point, DC's
liquidity risk stems predominantly from having to make margin calls under
the CSAs agreements with its derivative trading counterparty which the
company uses to manage its market and counterparty credit risk.
DC has an internal policy of always having €50 million of cash available.
Although DC is not part of any cash pooling arrangement with Equinor,
Moody's also considers Equinor's strong liquidity position which
the rating agency estimates to currently exceed $20 billion.
RATIONALE FOR NEGATIVE OUTLOOK
DC's Baa1 Issuer Rating incorporates a number of rating notches
uplift related to the oversight and support of its parent company,
Equinor. As DC's rating will remain closely linked to Equinor's
rating, the negative rating outlook of DC's rating reflects the
negative outlooks of Equinor's Aa2 rating. DC's rating outlook
will likely continue to reflect Equinor's rating outlook going forward.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATING
An upgrade of Equinor's rating may lead to an upgrade of DC's rating.
Absent a rating upgrade of Equinor's rating, DC's rating is unlikely
to be upgraded in the medium term. However, over time DC's
rating could be aligned more closely with Equinor's rating if DC develops
a longer term track record of being an integral and strategically important
part of Equinor's operations.
A downgrade of Equinor's rating may lead to a downgrade of DC's rating.
Absent a rating downgrade of Equinor's rating, DC's rating could
also be downgraded if the company's financial profile deteriorates notably
for example as a result of falling profit generation or the issuance of
a material debt amount. DC's rating could also be downgraded if
the company substantially increases the risk appetite of its trading activities.
PRINCIPAL METHODOLOGY
The principal methodology used in this rating was Trading Companies published
in June 2016 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_190422.
Alternatively, please see the Rating Methodologies page on www.moodys.com
for a copy of this methodology.
REGULATORY DISCLOSURES
For further specification of Moody's key rating assumptions and
sensitivity analysis, see the sections Methodology Assumptions and
Sensitivity to Assumptions in the disclosure form. Moody's
Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
For ratings issued on a program, series, category/class of
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same series, category/class of debt, security or pursuant
to a program for which the ratings are derived exclusively from existing
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issued on a support provider, this announcement provides certain
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support provider and in relation to each particular credit rating action
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provides certain regulatory disclosures in relation to the provisional
rating assigned, and in relation to a definitive rating that may
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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.
The rating has been disclosed to the rated entity or its designated agent(s)
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This rating is solicited. Please refer to Moody's Policy
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Regulatory disclosures contained in this press release apply to the credit
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review.
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and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.
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for additional regulatory disclosures for each credit rating.
Sven Reinke
Senior Vice President
Corporate Finance Group
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
Peter Firth
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
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