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Announcement:

Moody's reviews Enel's A2/P-1 and Endesa's A3 ratings for possible downgrade

16 Dec 2010

London, 16 December 2010 -- Moody's Investors Service has today placed the senior unsecured A2/Prime-1 ratings of Enel S.p.A. ("Enel") and guaranteed subsidiaries on review for possible downgrade. At the same time, Moody's also placed on review for possible downgrade the A3 ratings of Enel's 92% owned Spanish subsidiary, Endesa S.A. ("Endesa") and its guaranteed subsidiaries. Endesa's Prime-2 rating is affirmed.

RATINGS RATIONALE

The rating actions are triggered by the sustained high levels of debt that constrain Enel's financial performance, despite Enel implementing a largely successful disposals programme. This is primarily a result of the large, and still growing, tariff deficit at the level of Endesa. Additionally, Moody's remains concerned at the reluctance of the Spanish government to implement speedy and decisive measures -- without undue harm to the electricity companies -- to move towards fully cost-reflective tariffs, targeted for 2013. Consequently, the Enel group remains exposed to heightened financial and regulatory risks.

Moody's had originally anticipated that at least a sizeable portion of the tariff deficit-related receivables, which are backed by a Spanish government guarantee, would have been securitised by the end of 2010. In accordance with the Royal Decree of 6/2009 and subsequent legislation, the Spanish companies had placed EUR14.5 billion of tariff deficits into the securitisation fund as of July 2010. Whilst the necessary mechanisms and administrative approvals are now in place to allow this securitisation to proceed, issuance has been delayed by difficult market conditions and, in the context of the significant amount of amount of short-term debt that the Spanish government (Aa1, under review for possible downgrade) has to refinance in 2011, Moody's is concerned that the implementation of the securitisation of the tariff deficit will be further delayed. Furthermore, the rating agency regards it as unlikely that the Spanish government will be willing, in early 2011, to take decisive measures such that tariffs move towards full cost recovery and hence address the still growing tariff deficit.

Enel's ratings could therefore stabilise only if (i) measures are taken to address our concerns with regard to the Spanish regulatory system; or (ii) Enel is able to take specific compensatory measures to strengthen its financial profile to demonstrate credit metrics in line with the current rating guidance for an A2 rating (RCF/net debt of mid-teens, FFO/net debt of at least 20% and FFO/interest of more than 4x). Once these ratios have been achieved, Moody's would expect Enel's metrics to continue to strengthen in order to secure a solid positioning in the current rating category to offset (i) increasing exposure to higher-risk international activity; and (ii) the generally higher political and regulatory risks in key markets.

The last rating action on Enel and Endesa's ratings was implemented in April 2009, when a negative outlook was assigned following the acquisition by Enel of a final 25% stake in Endesa from Acciona. Moody's believes that the measures targeted by Enel to reduce debt and improve credit metrics -- a capital increase of EUR8 billion in 2009, and a 2009/10 disposals programme -- will be largely achieved by FYE 2010. The recovery in Enel's financial metrics is still nonetheless expected to be below those targeted for the rating category as at FYE 2010, primarily as a result of the tariff deficit.

Enel's consolidated unadjusted net debt was around EUR63 billion as of September 2010 (Moody's does not net-off financial receivables), of which a sizeable EUR8.5 billion relates to deficit-related receivables from the mainland and the islands. This debt level is expected to reduce by around EUR5 billion by the end of the year, after additional operating cash flow, dividend payments and further cash proceeds from disposals. Moody's treats the tariff deficit as debt in our calculation of Enel's credit metrics, but has historically had some tolerance in target metrics because (i) the tariff deficits represent a claim on the Spanish electricity system and will be government-backed receivables; and (ii) there was ongoing action to reduce them. To the extent that these receivables appear increasingly entrenched on companies' balance sheets, Moody's is likely to have limited flexibility for deviations from targeted metrics.

Enel's current A2 rating incorporates one notch from its fundamental credit-risk assessment for potential Italian government support in case of need, given its partial ownership by the Italian state. Endesa's A3 rating is aligned with that of Enel's fundamental risk assessment, (which is equivalent to an A3), without any uplift for Italian state support. Any rating downgrade is likely therefore to impact both Enel and Endesa, but in any event to be limited to one notch.

Entities and ratings affected by today's action are:

Long-term senior unsecured A2 ratings of Enel S.p.A. and its guaranteed subsidiaries, Enel Finance International S.A. and Enel Investment Holding B.V.

Prime-1 short-term rating of Enel Finance International S.A.

Long-term senior unsecured A3 ratings of Endesa S.A. and its guaranteed subsidiaries, International Endesa B.V. and Endesa Capital, S.A.

The Prime-2 rating of Endesa S.A. is unchanged.

The principal rating methodology used in rating these entities was the "Unregulated Utilities and Power Companies Methodology," published in August 2009.

Enel is Italy's largest vertically-integrated electric utility, with significant global operations. Its ownership of the leading Spanish utility, Endesa (92.06%), gives it significant presence in both Spain and Latin America. Enel additionally has interests in Central and Eastern Europe and Russia. Enel reported preliminary consolidated revenues of EUR64 billion as at FYE 2009.

London
Helen Francis
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

London
Monica Merli
MD - Infrastructure Finance
Infrastructure Finance
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

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 reviews Enel's A2/P-1 and Endesa's A3 ratings for possible downgrade
No Related Data.
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