Feb 15

Fitch Upgraded Bulgarian Energy Holding to 'BB'; Outlook Stable


Fitch Ratings (Fitch) has upgraded Bulgarian Energy Holding EAD's (BEH) ratings to 'BB' and assigned a ‘Stable’ outlook. The upgrade follows improvement in BEH's standalone credit profile after recovery and higher expected visibility in earnings as well as publication of Fitch’s new Government-Related Entities rating criteria.

The rating upgrade reflects the improved financial performance of and future expectations of Fitch for BEH and the narrowed power tariff deficit at BEH's subsidiary, Natsionalna Elektricheska Kompania EAD (NEK) – the public supplier of electricity in Bulgaria – as a result of legislative and regulatory changes.

Developments that could lead a positive rating action include further tangible government support such as state guarantees or cash injections, an upgrade of the sovereign rating as well as a stronger standalone credit profile due to lower regulatory and political risk, higher predictability of earnings, better corporate governance or FFO adjusted net leverage falling below 3x on a sustained basis. Fitch also notes that the energy market in Bulgaria has been transforming into a more liberalised one, which can provide for some upsides in group's EBITDA in the future.

Fitch maintains its ‘strong’ assessment for BEH’s ownership and control links with the Bulgarian state which contributes a one-notch uplift to BEH’s standalone profile. The assessment is driven by the expected receipt of state guarantees for BEH's gas interconnector project between Greece and Bulgaria (IGB project) as well as the 7-year interest free state-loan given to NEK by the Bulgarian state in December 2016 for the arbitration payment to Atomstroyexport. These two factors lead to a share of state-guaranteed and state-provided debt of about 40% at end-2017 which is expected to remain at this level over the rating horizon.

Fitch acknowledges that BEH's projected credit metrics are strong for the rating, however, the rating agency identifies certain factors that constrain the company’s rating, including weaknesses in the regulatory regime which despite the positive developments addressing NEK's tariff deficit, still pose a risk to the longer term sustainability of the improved financial performance of BEH. Escalation of the regulatory and political risk, weaker links with the Bulgarian state and a sustained increase in prior-ranking debt above a certain level are identified as developments that could lead to a negative impact on the ratings.

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