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Global Credit Research - 17 Mar 2011
London, 17 March 2011 -- Moody's has today downgraded the rating of Redes Energeticas Nacionais,
SGPS, S.A. ("REN") to Baa1 from A3. The rating
action concludes the review initiated on 21 December 2010. The
outlook assigned to the rating is negative.
Today's rating action follows Moody's earlier downgrade of the government
of the Republic of Portugal (RoP) from A1 (on review for downgrade) to
A3, with negative outlook. Moody's downgrade of the
RoP's rating was driven by (i) subdued growth prospects; (ii)
implementation risks for the ambitious fiscal consolidation targets;
(iii) the government's balance sheet may need to expand further
in the event it has to provide financial support to the banking sector
and certain government-related institutions which are currently
unable to access the capital markets; and (iv) challenging market
conditions that have led to increases in the government's financing
More particularly, the downgrade of REN's rating reflects
Moody's decision to rate the company on the basis of its fundamental
credit quality only. As a result, the rating agency has removed
the one-notch uplift that was previously incorporated within REN's
rating, which reflected the possibility of extraordinary support
from the RoP. This is driven by (i) the likelihood that the RoP
will decrease its 51% (direct and indirect) stake in REN through
further privatisation; and (ii) a reduced likelihood of support in
the context of a weaker sovereign, which may face increased demands
on its resources.
REN's Baa1 rating reflects the company's position as the electricity
and gas transmission system operator in Portugal, characterised
by a low business risk profile, fully regulated nature of its activities
and the well established and transparent regulatory framework.
From a financial perspective, REN's rating incorporates the
expectation that the company's significant EUR3.2 billion
investment programme will continue to weigh on its financial profile,
thus limiting financial flexibility at the current rating level.
The negative outlook associated with the rating reflects the weak positioning
of REN's credit metrics and the company's liquidity profile,
exhibiting material debt maturities in the second half of 2011 -
first half of 2012, which, in light of the recent actions
on the RoP, could make the company potentially vulnerable to higher
The outlook associated with REN's Baa1 rating could be stabilised
following improvements in REN's liquidity position and evidence
of limited exposure to potentially increasing borrowing costs, associated
with continued regulatory stability.
Based on REN's business risk profile, for the company to support
its current rating, Moody's would expect it to exhibit the
following ratios: (i) funds from operations (FFO) interest coverage
of 3.0x-4.0x; (ii) FFO/net debt in the low double-digits
to early teens; and (ii) retained cash flow (RCF)/net debt between
8% and 10% on a sustainable basis.
REN's rating could come under downward pressure if the company were
to experience difficulties in accessing debt markets at a sustainable
cost. Furthermore, if REN were to be privatised as planned,
there could be downward pressure on the rating dependent on the company's
expected post-privatisation capital structure. Finally,
negative rating pressure could develop if the company's financial
profile were to deteriorate below the ratio guidance discussed above.
REN's rating could come under upward pressure if the company's
financial profile were to improve over time beyond the ratio guidance
discussed above, assuming continued regulatory stability and sound
The principal methodology used in this rating was Regulated Electric and
Gas Networks published in August 2009.
Moody's last rating action on REN was on 21 December 2010,
when Moody's placed the company's rating under review for
REN is the exclusive long-term concessionaire of Portugal's mainland
high-voltage electricity transmission grid and the country's high-pressure
natural gas transportation network.
Information sources used to prepare the credit rating are the following:
parties involved in the ratings, parties not involved in the ratings,
public information, confidential and proprietary Moody's Investors
Service information, and confidential and proprietary Moody's
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a credit rating.
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Moody's adopts all necessary measures so that the information it uses
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independent third-party sources. However, Moody's
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Please see ratings tab on the issuer/entity page on Moodys.com
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Moody's Investors Service Ltd.
Moody's downgrades REN's rating to Baa1; negative outlook
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