29.03.2011, 22:00
Fitch Affirms DTEK at 'B'; Outlook Stable
OREANDA-NEWS. March 29, 2011. Fitch Ratings-London/Moscow-28 March 2011: Fitch Ratings has affirmed DTEK Holdings Limited's (DTEK) Long-term foreign currency Issuer Default Rating (IDR) at 'B' with Stable Outlook and DTEK Finance B.V.'s foreign currency senior unsecured rating at 'B' with a Recovery Rating of 'RR4'. A full list of ratings actions is at the end of this release.
DTEK's Long-term foreign currency IDR is capped by Ukraine's ('B'/Stable) Country Ceiling, while its Long-term local currency IDR and National Ratings are currently unconstrained. In July 2010, Fitch upgraded Ukraine's Long-term foreign currency IDR to 'B' from 'B-'. Following this, DTEK's Long-term foreign currency IDR was upgraded to 'B' from 'B-'. DTEK's Long-term local currency IDR and National ratings are rated above the sovereign, as they exclude the transfer and convertibility risk associated with foreign currency debt and reflect the comparatively stable, vertically integrated nature of DTEK's business.
The ratings reflect DTEK's leading positions in the Ukrainian coal mining, thermal power generation and distribution sectors, its competitive operating profile and cost position compared to its Ukrainian peers, and its long-term debt structure following the issuance of USD500m of Eurobonds in April 2010.
DTEK continues to benefit from a high level of integration between its coal-mining and coal-fired power generation business units, which helped it maintain its operating margins during the 2009 financial and economic downturn. Additionally, in FY10, DTEK should benefit from increased shipments of coal and improved coal prices as a result of a rebound in the global steel and energy markets. Fitch estimates that the share of coal mining in DTEK's consolidated revenues will increase to about 40% in FY10 from just above 30% in FY09.
Ukrainian domestic demand for coal and power started to improve in H209 and continued into 2010. Ukrainian steel products became more competitive globally following a 40% devaluation of the Ukrainian hryvnia (UAH) against the USD in 2009. Fitch's outlook for global steelmakers is stable.
Fitch conservatively estimates that DTEK's revenues will grow in line with Ukraine's GDP growth, which Fitch forecasts at 4%-5% in 2011-12. The agency forecasts that DTEK will continue to generate positive operating cash flows and maintain its leverage below that of many other CIS power generation and distribution companies, e.g., funds from operations (FFO) adjusted net leverage should stay below 1.7x in 2011-14 even after accounting for potential acquisitions and FFO interest coverage at above 6x over the same period.
Fitch considers there is some M&A risk in 2011. The Ukrainian officials announced earlier this year that they are planning to privatise a stake in Dniproenergo, which DTEK already owns 47.55% of, as early as Q211. Dniproenergo has an installed capacity of 8,185 MW, which is almost double the capacity of Eastenergo, DTEK's power generation subsidiary. However, Dniproenergo has a lower operating efficiency, i.e., its utilisation rate in 2010 was 34.3%, which is below Eastenergo's utilisation rate of 50.1% in the same year. Therefore, Fitch believes that in the event of an acquisition of Dniproenergo, DTEK's post-acquisition operating margins are likely to decline slightly.
Fitch also notes that DTEK's exposure to foreign currency risks is mitigated by its revenue receipts from export sales. Fitch calculates that DTEK's export revenues, which are mostly USD-denominated, comfortably cover its currency-denominated interest payments. DTEK does not currently hedge its forex exposure. Fitch notes that if there was a significant continued weakening of the UAH against the USD and EUR, DTEK's financial position including leverage and coverage ratios, may deteriorate.
DTEK is a coal mining and power generation business group owned by Ukrainian-based System Capital Management that is ultimately controlled by Mr. Rinat Akhmetov. DTEK transacts with other companies that are part of the same group of companies under the ownership of Mr. Akhmetov.
The ratings actions are as follows:
DTEK
Long-term foreign currency IDR: affirmed at 'B'; Outlook Stable
Short-term foreign currency IDR: affirmed at 'B'
Long-term local currency IDR: affirmed at 'B+'; Outlook Stable
Short-term local currency IDR: affirmed at 'B'
National Long-term Rating: affirmed at 'AA+(ukr)'; Outlook Stable
National senior unsecured rating: affirmed at 'AA+(ukr)'
DTEK's Long-term foreign currency IDR is capped by Ukraine's ('B'/Stable) Country Ceiling, while its Long-term local currency IDR and National Ratings are currently unconstrained. In July 2010, Fitch upgraded Ukraine's Long-term foreign currency IDR to 'B' from 'B-'. Following this, DTEK's Long-term foreign currency IDR was upgraded to 'B' from 'B-'. DTEK's Long-term local currency IDR and National ratings are rated above the sovereign, as they exclude the transfer and convertibility risk associated with foreign currency debt and reflect the comparatively stable, vertically integrated nature of DTEK's business.
The ratings reflect DTEK's leading positions in the Ukrainian coal mining, thermal power generation and distribution sectors, its competitive operating profile and cost position compared to its Ukrainian peers, and its long-term debt structure following the issuance of USD500m of Eurobonds in April 2010.
DTEK continues to benefit from a high level of integration between its coal-mining and coal-fired power generation business units, which helped it maintain its operating margins during the 2009 financial and economic downturn. Additionally, in FY10, DTEK should benefit from increased shipments of coal and improved coal prices as a result of a rebound in the global steel and energy markets. Fitch estimates that the share of coal mining in DTEK's consolidated revenues will increase to about 40% in FY10 from just above 30% in FY09.
Ukrainian domestic demand for coal and power started to improve in H209 and continued into 2010. Ukrainian steel products became more competitive globally following a 40% devaluation of the Ukrainian hryvnia (UAH) against the USD in 2009. Fitch's outlook for global steelmakers is stable.
Fitch conservatively estimates that DTEK's revenues will grow in line with Ukraine's GDP growth, which Fitch forecasts at 4%-5% in 2011-12. The agency forecasts that DTEK will continue to generate positive operating cash flows and maintain its leverage below that of many other CIS power generation and distribution companies, e.g., funds from operations (FFO) adjusted net leverage should stay below 1.7x in 2011-14 even after accounting for potential acquisitions and FFO interest coverage at above 6x over the same period.
Fitch considers there is some M&A risk in 2011. The Ukrainian officials announced earlier this year that they are planning to privatise a stake in Dniproenergo, which DTEK already owns 47.55% of, as early as Q211. Dniproenergo has an installed capacity of 8,185 MW, which is almost double the capacity of Eastenergo, DTEK's power generation subsidiary. However, Dniproenergo has a lower operating efficiency, i.e., its utilisation rate in 2010 was 34.3%, which is below Eastenergo's utilisation rate of 50.1% in the same year. Therefore, Fitch believes that in the event of an acquisition of Dniproenergo, DTEK's post-acquisition operating margins are likely to decline slightly.
Fitch also notes that DTEK's exposure to foreign currency risks is mitigated by its revenue receipts from export sales. Fitch calculates that DTEK's export revenues, which are mostly USD-denominated, comfortably cover its currency-denominated interest payments. DTEK does not currently hedge its forex exposure. Fitch notes that if there was a significant continued weakening of the UAH against the USD and EUR, DTEK's financial position including leverage and coverage ratios, may deteriorate.
DTEK is a coal mining and power generation business group owned by Ukrainian-based System Capital Management that is ultimately controlled by Mr. Rinat Akhmetov. DTEK transacts with other companies that are part of the same group of companies under the ownership of Mr. Akhmetov.
The ratings actions are as follows:
DTEK
Long-term foreign currency IDR: affirmed at 'B'; Outlook Stable
Short-term foreign currency IDR: affirmed at 'B'
Long-term local currency IDR: affirmed at 'B+'; Outlook Stable
Short-term local currency IDR: affirmed at 'B'
National Long-term Rating: affirmed at 'AA+(ukr)'; Outlook Stable
National senior unsecured rating: affirmed at 'AA+(ukr)'
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