Milan, March 18, 2011 -- Moody's Investors Service has today downgraded the ratings on a
number of Portuguese government-related issuers following the rating
agency's recent two-notch downgrade to A3 from A1 of the
ratings of the government of the Republic of Portugal ("RoP").
Concurrently, Moody's has assigned a Baa1 rating to the EUR885
million worth of senior unsecured exchangeable bonds due in 2017 issued
by Parpublica-Participacoes Publicas (SGPS), SA ("Parpublica").
All ratings have a negative outlook, in line with the ratings of
the government of the RoP.
The rating downgrades are as follows:
- Parpublica to Baa1 from A1
- Rede Ferroviaria Nacional REFER, EPE to Baa2 from A1
- REFER's bonds that are guaranteed by the government of
RoP to A3 from A1
- Radio e Televisao de Portugal S.A. ("RTP")
to Baa3 from A2
- Comboios de Portugal ("CP") to Baa3 from A3
The rating agency has also lowered to 17 (Caa1 equivalent) from 15 (B2
equivalent) the Baseline Credit Assessment (BCA) of RTP, and to
18 (Caa2 equivalent) from 17 the BCAs of REFER and CP. The BCA
is a measure of the company's stand-alone financial strength
(without the assumed benefit of government support).
All of the above companies are government-related issuers ("GRIs"),
which have a very strong element of government support incorporated within
their ratings in accordance with Moody's rating methodology for
The rating actions conclude the review for possible downgrade of these
entities, which Moody's initiated on 21 December 2010,
coinciding with the review of the sovereign ratings.
Today's rating actions follow Moody's downgrade to A3 from
A1 of the ratings of the government of the RoP, which was driven
by the following four factors: (i) subdued growth prospects over
the short to medium term until structural reforms, especially in
the labour market and the justice system, begin to bear fruit;
(ii) implementation risks for the government's ambitious fiscal
consolidation targets; (iii) the possible need for the balance sheet
of the government to expand further in the event that it has to provide
financial support to the banking sector and GRIs, which are currently
unable to access capital markets; and (iv) challenging market conditions,
which have led to increases in the government's financing costs.
If these cost increases are sustained, the government's debt
affordability will weaken, particularly in the context of generally
higher European interest rates. Accessing the European Financial
Stability Facility may lead to a reduction in financing costs, but
questions would remain as to when the government would be able to re-access
the capital markets and on what terms.
Moody's has widened the rating differential of these entities with
the sovereign. The rating differentials between these GRIs and
the sovereign is now one notch for Parpublica, two notches for REFER
and three notches for RTP and CP. The widening of these rating
differentials primarily reflects: (i) the GRIs' deteriorated
stand-alone liquidity and market access; (ii) the increasing
cost of debt for these entities; and (iii) the likelihood that these
GRIs will require increasing levels of government support in the short
term, which also reflects the downgrade of their BCAs. Despite
a very high likelihood of support by the government and its close links
with the GRIs, there is less certainty regarding timely provision
of support in the event of need. This reflects the possibility
that, over time, liquidity and capacity constraints for the
government might create more uncertainty in terms of how it prioritises
the provision of support among banks and GRIs. The background to
this is that the government's market access has itself weakened,
as reflected by the sovereign rating downgrade to A3, and its financial
flexibility may further diminish in the event it has to increase its balance
sheet to provide financial support to the banking sector and the GRIs,
which have been shut out of the capital markets, the former for
nearly a year.
The Baa1 rating of Parpublica, which is one notch below the sovereign
rating, reflects that it will remain a strategic company for the
government because it manages some of the state's industrial holdings.
In addition, while it does not enjoy an explicit guarantee from
the government, it benefits from article 501 in the Portuguese Companies
Code, which determines that the state is liable for Parpublica's
obligations. It also reflects that the stand-alone profile
of Parpublica, in terms of debt to assets value and its capacity
to monetise assets, appears more favourable than those of the other
GRIs. In the case of Parpublica, Moody's applies credit
substitution, supported by the companies' particular business
objective. Therefore, the rating agency does not publish
a granular analysis of typical GRI factors, i.e. support
and dependence in addition to the baseline credit assessment (BCA) and
The downgrade of REFER's rating to Baa2 reflects its very poor stand-alone
credit profile. Moody's believes that it is very likely that
RoP would provide financial support to REFER, considering the sizeable
portion of REFER's debt that is guaranteed by RoP and could become
due in the event of defaults on other debts. However, the
timely support appears less certain amid current stress conditions.
Moody's has lowered REFER's BCA to 18 from 17, reflecting
the rating agency's view that REFER, on a stand-alone
basis, would be increasingly challenged to cover its financing requirements
given the constraints in the debt markets and increased debt costs in
Portugal. REFER has a very weak financial profile and a debt burden
that is substantially more than can be supported by generated cash flow.
The company also has significant funding requirements over the next 12
months to meet interest expense, its capital expenditure programme
and debt refinancing requirements. In addition, REFER has
a poor liquidity position given its large financing requirements relative
to available committed liquidity support. A material part of this
liquidity support comes in the form of a EUR500 million committed bank
loan facility, which is available for drawing until August 2011.
Consequently, REFER is increasingly exposed to debt market conditions.
The downgrade of CP's rating to Baa3 reflects its very poor stand-alone
credit profile and Moody's view that it is marginally less likely
that RoP would provide timely financial support to CP given the possible
claims on RoP resources amid current financial conditions. Moody's
has lowered CP's BCA to 18 from 17 to reflect a weakening of the
company's liquidity profile due to the increasing difficulties faced
by Portuguese GRI entities in gaining direct access to the capital markets,
and hence an increase of CP's reliance on government support.
The downgrade of RTP's rating to Baa3 primarily reflects Moody's
downgrade of its BCA to 17 from 15 in light of the company's weakening
liquidity profile. This deterioration is a result of (i) reduced
headroom under covenants; and (ii) the more challenging environment
that the company will face to refinance its maturing debt in 2013,
given the problems that Portuguese GRIs are currently experiencing to
access capital markets. In addition, the rating downgrade
reflects that a timely provision of support may be marginally less likely
than for the other GRIs.
The negative outlook on these entities reflects the negative outlook on
the RoP's rating.
In line with the negative outlook, Moody's does not expect
positive pressure to be exerted on the ratings of these entities in the
short term. However, further negative pressure could develop
in the event of: (i) a further deterioration in the sovereign rating;
(ii) a further weakening of the liquidity profiles of the individual entities;
or (iii) any indication of a change in RoP's willingness/capacity
to intervene in a timely manner to support these GRIs in the event of
need, and/or propensity to support or encourage a more selective
approach in terms of prioritising where to direct government funding.
For additional information on rating factors, please refer to the
individual issuer credit opinions, available on www.moodys.com.
PREVIOUS RATING ACTION & METHODOLOGY USED
Please see the ratings tab on the issuer/entity page on www.moodys.com
for the last rating action and the rating history of each issuer.
The principal methodologies used in this rating were Government-Related
Issuers: Methodology Update published in July 2010, and Global
Passenger Railway Companies published in December 2008.
Parpublica is a state-owned industrial holding company domiciled
in Lisbon, Portugal. Parpublica's main role is the
management of equity stakes held by the Portuguese state in Portuguese
companies of public or strategic interest in terms of restructuring of
the corresponding sector. The Minister of Finance acts on behalf
of the state, in its capacity as sole shareholder of Parpublica.
As of March 2011, Parpublica's direct equity holdings portfolio
had a book value of approximately EUR5 billion. The largest holdings
are in Energias de Portugal, S.A. (EDP), GALP
Energia, REN -- Redes Energeticas Nacionais, TAP airline
Rede Ferroviária Nacional - REFER, E.P.E.
is a special status corporation set up by Portuguese Decree Law to upgrade,
operate and maintain substantially all of Portugal's heavy rail
infrastructure. REFER is owned 100% by the Republic of Portugal
and has a special legal status (Entidade Pública Empresarial,
or "EPE") that defines its role as a company undertaking activities
of public interest. By law, REFER may not be privatised,
and Moody's does not consider likely any change of status and subsequent
privatisation given the company's financial position, its
role within the railway industry, and its public policy mandate.
CP, headquartered in Lisbon, Portugal, is the national
railway incumbent, controlling 90% of the passenger market.
CP is 100% owned by the Portuguese government though the Ministry
of Finance and it has a special legal status (Entidade Pública
Empresarial, or "EPE") that defines its role as a company
undertaking activities of public interest. In fiscal year 2009,
CP reported revenues of EUR312 million.
RTP is a corporation, duly incorporated under domestic law,
and therefore subject to standard Portuguese commercial law. RTP
is 100% owned by the Portuguese state through the General Directorate
of Treasury and Finance, and has operated Portugal's public
service broadcasting channels under a concession from the government since
Information sources used to prepare the credit rating are the following:
parties involved in the ratings, public information, and confidential
and proprietary Moody's Investors Service information.
Moody's Investors Service considers the quality of information available
on the issuer or obligation satisfactory for the purposes of maintaining
a credit rating.
The rating has been disclosed to the rated entity or its designated agents
and issued with no amendment resulting from that disclosure.
On our website www.moodys.com, you can find further
information and any updates on the Lead Analyst to a specific Credit Rating,
and the office from which the credit rating was issued.
In addition to the above general contact information please find,
for each of the Credit Ratings affected, Moody's regulatory
disclosures on the lead analyst and the Moody's office that has
issued the Credit Rating on the ratings tab of the issuer page at www.moodys.com.
Moody's Investors Service may have provided Ancillary or Other Permissible
Service(s) to the rated entity or its related third parties within the
three years preceding the Credit Rating Action. Please see the
ratings disclosure page www.moodys.com/disclosures on our
website for further information.
Moody's adopts all necessary measures so that the information it uses
in assigning a credit 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.
Please see ratings tab on the issuer/entity page on Moodys.com
for the last rating action and the rating history.
The date on which some Credit Ratings were first released goes back to
a time before Moody's Investors Service's Credit Ratings were fully digitized
and accurate data may not be available. Consequently, Moody's
Investors Service 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 the Credit Policy page on Moodys.com for the methodologies
used in determining ratings, further information on the meaning
of each rating category and the definition of default and recovery.
VP - Senior Credit Officer
Corporate Finance Group
Moody's Italia S.r.l
Paloma San Valentin
MD - Corporate Finance
Corporate Finance Group
Moody's Investors Service Ltd.
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Moody's downgrades certain Portuguese government-related issuers
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