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Rating Action:

Moody's assigns first-time Baa1 rating to Danske Commodities; outlook negative

19 Jun 2020

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 debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security 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.

The rating has been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

This rating is solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

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

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.

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.

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

Releasing Office:
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

No Related Data.
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