London, 18 October 2012 -- Moody's Investors Service has today confirmed the Baa2 senior unsecured
ratings of Red Eléctrica de España, S.A.U.
(REE) and the guaranteed debt of its affiliates and assigned a negative
outlook. This concludes the review process initiated on 15 June
2012.
Today's announcement follows Moody's confirmation of the Spanish
sovereign rating at Baa3 with a negative outlook. For full details
on the rationale for the sovereign rating confirmation, please refer
to the press release of 16 October 2012 (http://www.moodys.com/research/Moodys-confirms-Spains-government-bond-rating-at-Baa3PP-3-assigns--PR_257500).
RATINGS RATIONALE
The confirmation of REE's ratings at Baa2, placing them at
one notch above the sovereign, reflects the company's (1)
strategic position as the owner and operator of the country's transmission
assets; (2) focus on its domestic regulated business; (3) important
role in executing on the country's national energy plan; (4)
relatively strong financial profile; and (5) adequate liquidity.
Moody's confirmation of the ratings also takes into account its
expectation that, although the government's raft of regulatory
measures announced in September and aimed at the Spanish electricity sector
will not have a direct effect on REE, legislation announced in March
will have a moderately negative impact on the company. This legislation
included (1) the removal of accelerated depreciation for tax purposes
on new investments as from April 2012 -- which had been
previously advantageous for REE -- and (2) the deferral
of remuneration for new investments by one year.
Further to these measures, and in response to a more difficult macroeconomic
environment that is leading to lower demand, the government also
asked REE to review its medium-term investment plan. As
a result, Moody's expects REE to focus on an already-authorised
reduced plan of investments of around EUR2.5 billion, versus
the previous EUR4.0 billion. Therefore, despite moderately
weakened cash flows as a result of the measures noted above, Moody's
would expect REE to maintain solid financial metrics, including
retained cash flow (RCF)/net debt in low double digits in percentage terms
and funds from operations (FFO)/net debt in the mid to high teens.
At the same time, the one-notch rating differential with
the sovereign reflects REE's close linkages to Spain, with
the company's earnings virtually exclusively domestic. Therefore,
multiple channels of contagion exist between sovereign and corporate issuers,
as Moody's points out in its February 2012 Rating Implementation
Guidance "How Sovereign Credit Quality May Affect Other Ratings".
This means that REE remains exposed to potential further adverse developments
on a regulatory, fiscal, liquidity and macro-economic
level.
Moody's expects that the company will continue to maintain sufficient,
diversified sources of liquidity in order to (1) withstand periods of
difficult market access that may arise; and (2) avoid overconcentration
of exposure to the Spanish banking system.
WHAT COULD CHANGE THE RATING UP/DOWN
The negative outlook on the ratings is in line with that of the sovereign,
it is therefore unlikely that upward rating pressure will develop in the
medium term.
Further negative rating pressure could develop (1) if Moody's were
to downgrade the sovereign rating; or (2) in the event of significant
increased regulatory, fiscal or liquidity pressure on the fundamental
credit strength of the company, leading to a weakening of its business
or financial profile.
Ratings affected by today's action are:
-- Long-term issuer rating of Red Eléctrica
de España, S.A.U. (REE)
-- the backed senior unsecured Baa2 debt ratings of REE's
affiliate, Red Electrica Financiaciones, S.A.U.,
including its medium-term note (MTN) programme rated (P)Baa2
-- the backed senior unsecured Baa2 debt ratings of Red
Electrica de Espana Finance B.V., including its MTN
programme rated (P)Baa2
PRINCIPAL METHODOLOGY
The principal methodology used in these ratings was Regulated Electric
and Gas Networks published in August 2009. Please see the Credit
Policy page on www.moodys.com for a copy of this methodology.
REE, based in Madrid, Spain, is the owner and operator
of the Spanish transmission grid. As of fiscal year ended 2012
it had revenues of EUR1.6 billion.
REGULATORY DISCLOSURES
For ratings issued on a program, series or category/class of debt,
this announcement provides relevant 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 relevant regulatory disclosures in relation
to the rating action on the support provider and in relation to each particular
rating action for securities that derive their credit ratings from the
support provider's credit rating. For provisional ratings,
this announcement provides relevant 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
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Helen Francis
VP - Senior Credit Officer
Infrastructure Finance
Moody's Investors Service Ltd.
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Monica Merli
MD - Infrastructure Finance
Infrastructure Finance
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Moody's confirms REE's Baa2 rating; outlook negative