Fitch places Bulgaria’s Eurohold on rating watch negative over CEZ asset deal

By bne IntelliNews June 29, 2019

Fitch Ratings said it has placed the ratings of Bulgarian financial and insurance group Eurohold and its insurance units, Euroins Bulgaria, Euroins Romania Asigurare Reasigurare and Insurance Company EIG Re, on rating watch negative (RWN) following the announcement that Eurohold plans to acquire the Bulgarian assets of the Czech power utility company CEZ.

In June, Eurohold said it has signed a deal with CEZ to buy its local assets for €335mn.

“The RWN reflects Fitch's view that the proposed acquisition of CEZ assets could give rise to financial risks due to the expected high debt proportion in the financing structure as well as integration and execution risks,” Fitch said in a press release.

It added that the planned high debt proportion of minimum 75% in the financing structure of the deal could significantly reduce distributable earnings from CEZ assets especially in the initial period.

Eurohold intends to borrow €300mn from international banks and increase its capital to secure the remaining sum.

On the other hand, Fitch noted that power distribution, the largest and most profitable business in the transaction, is regulated and produces stable cash flows, so over time the acquisition of CEZ’s assets should contribute to higher stability and predictability of Eurohold's earnings.

“This could contribute positively to the group's credit profile in the medium- to long-term,” Fitch noted.

Eurohold, which has no previous experience in managing power utilities, has said that it will retain CEZ Bulgaria’s current management for at least three years, aiming to secure a smooth transition.

“However, we expect the integration will also require significant management resources from Eurohold. As a predominantly financial investor, Eurohold is also likely to look for cost-saving opportunities to further improve its return on investment, which could give rise to additional execution risks,” Fitch noted.

The rating agency expects the transaction to be broadly neutral to Eurohold's insurance-related financial leverage ratio and capitalisation, but also to increase financial leverage at consolidated Eurohold level due to the highly leveraged nature of the transaction.

“Fitch also believes Eurohold would provide additional support to the financing structure (with or without a legal obligation) if necessary to protect its investment. Such a scenario could put additional pressure on Eurohold's capitalisation and/or financial leverage,” Fitch noted.

Eurhold plans to issue €80mn preferred shares to partly fund the acquisition of CEZ assets. These shares would carry fixed dividends to be covered by Eurohold's net or retained earnings. Fitch said this could have a slightly negative effect on Eurohold's insurance-related fixed charge coverage ratio.

The rating agency also sees high execution risk associated with the debt servicing capability of CEZ assets.

Fitch will resolve the watch negative after the deal is approved by the Bulgarian authorities and after completing its assessment of the standalone credit profile of CEZ assets and the final financing structure.

CEZ decided to leave the country over long-standing disputes with the Bulgarian authorities, and the deal with Eurohold comes after an earlier deal struck by the Czech utility to exit its investment in the country was blocked by regulators.

The deal is yet to be approved by the authorities in Bulgaria, where the financial supervision body has launched a probe into Eurohold and in its main units. The anti-monopoly regulator, which blocked the original deal to sell CEZ's assets to Inercom, now has to approve the contract with Eurohold.

In Bulgaria, CEZ operates an electricity distribution business with 2mn customers, a retail electricity supplier, and a wholesale trader. The Varna coal-fired power plant also owned by the firm has an installed capacity of 1,265 MW, and was subsequently acquired by Ahmed Dogan, the chairman of honour of Bulgaria’s ethnic-Turk Movement for Rights and Freedoms (DPS). In addition, CEZ owns two renewable plants.

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