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Rating Action:

Moody's downgrades Veolia's rating to Baa1; stable outlook

07 Feb 2012

Affirms P-2 senior unsecured rating

London, 07 February 2012 -- Moody's Investors Service has today downgraded to Baa1 from A3 the senior unsecured ratings of Veolia Environnement SA ("Veolia" or "the group"). Concurrently, Moody's has affirmed Veolia's Prime-2 (P-2) senior unsecured rating, which was not on review. Today's rating action concludes the review for downgrade initiated by Moody's on 13 December 2011. Please see below for a full list of the ratings affected by today's action.

RATINGS RATIONALE

"Today's rating action reflects increased pressure on Veolia's earnings and cash flows from a combination of a weak operating environment, the costs of restructuring the group and its commitment to a dividend payout of EUR0.70 per share in 2012 and 2013," says Niel Bisset, a Moody's Senior Vice President and lead analyst for Veolia. "We therefore consider it unlikely that Veolia's financial flexibility will match its current guidance for an A3 rating," explains Mr Bisset. "The Baa1 rating also factors in the likely evolution of Veolia as it carries out its new strategic plan, which in our view will lead to a gradual rise in its business risk, as well as the targeted reduction in the group's financial leverage."

Moody's notes that Veolia's strategic plan, presented in December 2011, is designed to address the pressures being exerted on the group's revenue growth and profitability in the mature economies in which it operates. The plan provides for (i) the restructuring of the group's divisions and portfolio of activities through a substantial EUR5 billion divestment programme over 2012-13, which will see it reduce the number of countries in which it operates to less than 40 from more than 70; (ii) a reduction in the group's net financial debt to under EUR12 billion by end-2013 from an estimated EUR15 billion at end-2011; and (iii) a reduction in its cost base by streamlining and introducing a greater standardisation of management structures across the group.

Moody's notes that as the plan is put into effect, Veolia should benefit progressively from a more focused asset portfolio and a reduced cost base. However, the Baa1 rating is positioned to factor in the rating agency's view that Veolia's overall business risk profile has been weakened by the ongoing margin pressure experienced in the group's mature French water business. The rating also factors in Moody's view that the relative volatility of Veolia's revenues and cash flows is likely to rise as its business mix evolves in the coming years, for example in the following ways: (i) as it increases its exposure to faster growing markets, including Central and Eastern Europe and China, this will lead to a rise in the proportion of the group's cash flows exposed to volume risk; (ii) the group's targeted shift towards the industrial sector is likely to result in a higher proportion of shorter-dated performance-oriented contracts, in Moody's view; and (iii) there is a risk that the group's emphasis on less capital intensive areas could be reflected in reduced earnings visibility and additional exposure to commodity prices.

In addition, Moody's factors into the rating Veolia's intention to apply the majority of disposal proceeds to debt reduction, and that it aims to achieve lower financial leverage as it undergoes restructuring. The group's medium-term target is for net debt/EBITDA to decline to 3.0x from its current target range of 3.85-4.35x. However, the Baa1 rating also takes account of the uncertainties around the timing and extent of delivery of the group's new strategy in current challenging markets, as well as the costs associated with closing operations in more than 30 countries. Although Veolia has a reasonable track record in recent years of realising targeted disposal proceeds, completing the planned divestments on a timely basis will present a considerable challenge, in Moody's view. Also uncertain at this stage is the extent to which Veolia will be able to retain the benefits of its Convergence cost cutting plans.

In the meantime, the negative pressure likely to be exerted on Veolia's cash flows by the costs of restructuring, the weak market outlook and the commitment to a dividend pay-out of EUR0.70 per share in 2012 and 2013 will increase the risk that its financial flexibility will fall short of Moody's current ratio guidance for the A3 rating.

Taking into account the evolution of Veolia's business risk profile as it pursues its new strategy, Moody's considers that the group will need to remain aligned with the following financial parameters for its Baa1 rating: (i) a retained cash flow (RCF)/net debt ratio of at least the mid-teens in percentage terms; (ii) a funds from operations (FFO)/net debt ratio of around 20% in percentage terms; and (iii) a FFO/interest ratio of more than 4.0x.

Moody's views Veolia as positioned with some headroom at Baa1, as reflected in the stable outlook on the ratings.

WHAT COULD CHANGE THE RATING UP/DOWN

Given the current pressures on earnings and the potential risks to recovery, Moody's does not consider an upgrade of Veolia's ratings to be likely in the near term. However, upward pressure on the rating could develop over the medium term if Veolia were to deliver on its new strategy such that it achieved RCF/net debt approaching 20% on a sustainable basis.

Negative pressure on Veolia's ratings could result if weaker-than-expected operating performance or shortfalls in asset disposals were to put at risk its planned deleveraging such that RCF/net debt were to be positioned consistently in the low-teens in percentage terms.

As a result of today's rating action, the following ratings have been downgraded:

Veolia Environnement SA: the senior unsecured debt and issuer ratings to Baa1 and (P)Baa1 from A3 and (P)A3

The following rating was affirmed:

Veolia Environnement SA: the Prime-2 commercial paper rating

PRINCIPAL METHODOLOGY

Veolia's ratings were assigned by evaluating factors that Moody's considers relevant to the credit profile of the issuer, such as the company's (i) business risk and competitive position compared with others within the industry; (ii) capital structure and financial risk; (iii) projected performance over the near to intermediate term; and (iv) management's track record and tolerance for risk. Moody's compared these attributes against other issuers both within and outside Veolia's core industry and believes Veolia's ratings are comparable to those of other issuers with similar credit risk.

Headquartered in Paris, France, Veolia Environnement S.A. is the parent company of one of the world largest integrated environmental services and outsourcing groups. In the first nine months of 2011, the company reported revenues of EUR24 billion and adjusted operating income of EUR1.3 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 ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

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

Information sources used to prepare the 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 Analytics information.

Moody's considers the quality of information available on the rated entity, obligation or credit satisfactory for the purposes of issuing a rating.

Moody's adopts all necessary measures so that the information it uses in assigning a rating is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

Moody's Investors Service may have provided Ancillary or Other Permissible Service(s) to the rated entity or its related third parties within the two years preceding the credit rating action. Please see the special report "Ancillary or other permissible services provided to entities rated by MIS's EU credit rating agencies" on the ratings disclosure page on our website www.moodys.com for further information.

Please see the ratings disclosure page on www.moodys.com for general disclosure on potential conflicts of interests.

Please see the ratings disclosure page on www.moodys.com for information on (A) MCO's major shareholders (above 5%) and for (B) further information regarding certain affiliations that may exist between directors of MCO and rated entities as well as (C) the names of entities that hold ratings from MIS that have also publicly reported to the SEC an ownership interest in MCO of more than 5%. A member of the board of directors of this rated entity may also be a member of the board of directors of a shareholder of Moody's Corporation; however, Moody's has not independently verified this matter.

Please see Moody's Rating Symbols and Definitions on the Rating Process page on www.moodys.com for further information on the meaning of each rating category and the definition of default and recovery.

Please see ratings tab on the issuer/entity page on www.moodys.com for the last rating action and the rating history.

The date on which some ratings were first released goes back to a time before Moody's ratings were fully digitized and accurate data may not be available. Consequently, Moody's provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

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.

Niel Bisset
Senior Vice President
Infrastructure Finance
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Monica Merli
MD - Infrastructure Finance
Infrastructure Finance
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 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
SUBSCRIBERS: 44 20 7772 5454

Moody's downgrades Veolia's rating to Baa1; stable outlook
No Related Data.
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