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Rating Action:

Moody's changes Redexis' outlook to negative; affirms Baa3 ratings

15 Dec 2017

London, 15 December 2017 -- Moody's Investors Service had today changed the outlook to negative from stable on the Baa3 senior unsecured ratings of Redexis Gas S.A (Redexis) and its guaranteed finance vehicle, Redexis Gas Finance B.V. At the same time Moody's has affirmed the existing ratings and assigned a Baa3 senior unsecured rating to the EUR250 million 1.875% eurobond due 2027, a tap of the existing EUR250 million 2027 bonds, issued by Redexis Gas Finance B.V. and guaranteed by Redexis.

A list of affected ratings is provided at the end of this press release.

RATINGS RATIONALE

RATIONALE FOR NEGATIVE OUTLOOK

The rating action follows the recent EUR250 million bond issuance by Redexis and the company's statement that it will use some of the proceeds to fund a special dividend. In the context of an already highly-leveraged capital structure, increasing gearing to make additional dividend payments evidences a financial policy that favours shareholders over creditors. Moreover, and to the extent bond proceeds are distributed, the additional debt will erode financial flexibility and increase the risk that key credit metrics will fall below Moody's guidance for the current rating category of Funds from Operations (FFO)/net debt of solidly in the low double digits, in percentage terms. Moody's expects that the Board of Redexis will also take account of the EUR41.6 million proceeds from the recent securitisation of the 2014 tariff deficit when determining the final dividend payment for 2017, which could result in a substantial payout.

A decision by Redexis' shareholders is likely to be taken in forthcoming months. Financial metrics of FFO/net debt, in the region of 11-12% over the 2015-17 period, could deteriorate towards 10%, depending on the size of the dividend payout and the evolution of the company's business performance.

Redexis, however, has also indicated that the debt proceeds would be used for investments as well as for debt refinancing, and Moody's understand that outstanding borrowings under its capex facility will be repaid. The company has additionally extended its revolving credit and capex facilities, amounting to EUR300 million, until 2022.

Low gas penetration in Spain and Redexis' well diversified presence is supportive of the company's strategy which is focused on entering new municipalities and those with limited access to gas. Redexis continues to have ambitious capex plans, and the rating agency expects the company to target around EUR130-140 million of investments annually, generating limited or negative free cash flow and maintaining high leverage levels. At the same time, both capex and dividends are flexible, giving management and shareholders scope to modify plans in the event of operating or financial challenges. The rating takes into account that the company's infrastructure and pension fund shareholders continue to target an investment grade rating.

AFFIRMATION OF RATINGS

The affirmation of the Baa3 ratings reflects the generally low business risk profile of Redexis' regulated businesses which contribute over 90% of revenues, as well as its young asset base and diversified network operations, balanced between both urban and rural areas and domestic and industrial customers. The company has made solid progress in growing its asset base, partly through complementary acquisitions and maintained solid EBITDA margins, at well over 70%, although these weakened slightly on recent LPG acquisitions.

The rating additionally factors the generally transparent regulatory framework in Spain following the July 2014 reforms of the gas sector, which is unlikely to be updated in the regulatory period which currently runs to 2020. The gas tariff deficit could stabilise in 2017/18 before slowly reducing against a background of gradually increasing gas demand, although this can be variable year on year.

At the same time the rating is constrained by (1) Redexis' small scale although the company continues to build a solid operational track record; (2) significant leverage and the likelihood that growth investments and dividends will limit improvement in financial metrics; and (3) exposure to inflation and volume risk under current regulation.

The Baa3 rating assigned to the EUR250 million of new debt reflects the terms of the bonds, in particular the guarantee provided by Redexis.

FACTORS THAT COULD MOVE THE RATING UP/DOWN

Upward pressure on the rating is not currently foreseen given the expected deterioration in financial ratios and aggressive financial policy of its shareholders. The outlook could stabilise if the company maintains a sufficiently balanced financial policy and a steady track record of business and financial growth such that it can achieve and maintain a financial profile of FFO/net debt solidly in the low double digits in percentage terms. This growth is likely to presuppose a stable regulatory environment in Spain for gas networks.

Conversely, downward pressure on the rating could result from the company's failure, on a consistent basis, to maintain a financial profile in line with the Baa3 rating, in particular if it appeared that financial metrics were likely to fall persistently below Moody's guidance for the current rating. This could be the result of ongoing large dividend payments, negative regulatory developments, a more difficult operating environment or an increased level of investment without commensurate growth in earnings.

LIST OF AFFECTED RATINGS

New assignments:

Issuer: Redexis Gas Finance B.V.

EUR250m GTD EUR MTNS, Assigned Baa3

Affirmations:

Issuer: Redexis Gas Finance B.V.

EUR2000M GTD EUR MTN Program, Affirmed (P)Baa3

EUR650m GTD EUR MTNS, Affirmed Baa3

EUR250m GTD EUR MTNS, Affirmed Baa3

Issuer: Redexis Gas, S.A.

LT Issuer Rating Dom and For Curr, Affirmed Baa3

Outlook actions:

Issuer: Redexis Gas, S.A.

Outlook changed to Negative from Stable

Issuer: Redexis Gas Finance B.V.

Outlook changed to Negative from Stable

The principal methodology used in these ratings was Regulated Electric and Gas Networks published in March 2017. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Redexis Gas S.A., based in Madrid, Spain is the country's second largest gas transmission and fourth largest gas distribution company. As at FYE 2016 it had revenues of EUR211 million.

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
VP-Sr Credit Officer
Infrastructure 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

Neil Griffiths-Lambeth
Associate Managing Director
Infrastructure 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.
© 2021 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

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​
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