Fitch Downgrades DTEK's IDRs to 'C'
The Long-term IDRs downgrades to 'C' indicate that default is imminent, due to the company's very weak liquidity profile.
KEY RATING DRIVERS
Imminent Refinancing Risk
The 'C' IDRs indicate that default is imminent. DTEK faces imminent liquidity risk as its cash position is not sufficient to cover onerous short-term maturities in 2015. The company's cash position of USD341m as of end-2014 was well below its short-term maturities of USD598m due in 2015 and USD641m due in 2016 (excluding revolving lines and letters of credit in the amount of USD416m), which include the remaining USD200m portion of its USD500m eurobonds due on 28 April 2015.
Foreign Currency Exposure
DTEK is exposed to high foreign currency fluctuations risk, as most of its debt is denominated in foreign currencies, i.e. US dollar (63% of total debt at end-2014), euro (27%) and rouble (2%). This contrasts with less than 10% of its revenue in US dollar in 2014, while most of its remaining revenue is denominated in hryvna. An increase of the economic and political uncertainty in Ukraine has led to significant hryvna devaluation against major currencies (hryvna has lost 97% against the US dollar in 2014 and additional 38% so far in 2015). The company does not fully hedge its FX risks. However, more than 70% of its cash is kept in US dollar and euro.
High Exposure to Local Banks
DTEK's liquidity position is weakened by its high exposure to domestic banks. In our analysis we assumed a portion of cash held at the Ukrainian banks as restricted, due to the banks' low credit quality, and estimated unrestricted cash at UAH5.4bn (USD341m) as of end-2014.
In addition, a significant portion of cash is kept at First Ukrainian International Bank, which is owned by SCM, DTEK's parent company.
Breach of Covenants
Continued hryvna devaluation resulted in certain financial covenants being breached as of 31 December 2014 under a number of facility agreements of the company. For the avoidance of occurrence of events of default under relevant facilities DTEK has approached its creditors in advance with waiver and consent requests covering the issues related to breach of financial ratios. As at end-2014, DTEK has obtained waivers covering the breach of covenants from a number of the lenders, and is continuing the work to obtain such waivers from the rest of the lenders. However, these covenants breach will not constitute an event of default as they are not maintenance covenants. Financial covenants (i.e. consolidated leverage ratio) as per the eurobonds documentation restrict DTEK's ability to incur additional debt, except for certain types of permitted indebtedness. Additionally, the bonds indenture includes a cross-acceleration clause provision, which is applicable to the extent the acceleration of other financial indebtedness (subject to certain thresholds) takes place.
Political Instability
The on-going political and economic uncertainty - Fitch is forecasting a 5% decline in Ukraine's GDP and 26% inflation increase for 2015 - is likely to continue to have a material adverse impact on DTEK's credit metrics. Although assets located in Donetsk and Lugansk regions account for a significant part of DTEK's EBITDA and revenue, the company assesses its exposure to the conflict area as much smaller. Moreover on 21 January 2015, Crimea authorities passed a resolution to expropriate the property of DTEK's subsidiary Krymenergo located in the region. However, DTEK's exposure to Crimea is limited as its electricity distribution in Crimea accounted for less than 3% of revenue and around 2% of EBITDA in 2014.
Profitability Continues to Deteriorate
Despite economic deterioration in Ukraine, DTEK manages to demonstrate almost stable financial performance in hryvna, with 2014 revenue up 0.2% yoy and EBITDA down only 4% yoy, based on Fitch estimates. However, EBITDA margin in 2014 declined further to 15%, from almost 16% in 2013 and 20% in 2012. We expect margins to remain under pressure in 2015 as the recently approved tariff increase is likely to be offset by the forecasted cost pressures.
On-going Reorganisation
DTEK is in the process of reorganisation and in 2014 it spun off its newly-acquired gas company and its electricity renewables generation and re-named the group from DTEK Holdings B.V. to DTEK Energy B.V. The final corporate reorganisation is aimed at separating the different businesses within the group and at deleveraging the newly formed DTEK Energy, which will include coal, thermal power plants and electricity distribution assets. As of end-2014 DTEK Renewables' debt was consolidated under DTEK Energy B.V., Fitch has therefore not excluded the debt of renewable energy company and oil and gas division from DTEK's gross debt.
Ukraine's Leading Utilities Company
DTEK's ratings are supported by its leadership in coal mining, power and heat generation, electricity distribution and sales among Ukraine's utility companies. With installed electric capacity of around 19 gigawatts at end-2014, DTEK ranks among the largest Fitch-rated CIS power utilities. Fitch believes that DTEK will continue to occupy the leading position among private Ukrainian utility companies for at least the medium term. Its vertical integration in coal mining, power generation and distribution supports its profitability.
KEY ASSUMPTIONS
Fitch's key assumptions within our rating case for DTEK include:
- GDP decline in Ukraine by 5% and inflation increase by 26% in 2015
- Electricity consumption to decline faster than GDP decline
- Electricity tariffs to increase well below inflation, with export electricity tariffs to increase as a result of further UAH devaluation
- Expected refinancing of short-term maturities
- Debt split by FX assumed to be in line with 2014 breakdown
- Capital expenditure broadly at 2014 levels
RATING SENSITIVITIES
Negative: Future developments that could lead to negative rating action include:
- Failure by the company to secure refinancing of the eurobonds and short-term bank maturities in the coming weeks
Positive: Future developments that could lead to positive rating action include:
-Successful refinancing of short-term maturities
-Achievement of a more sustainable liquidity profile with manageable short-term debt levels
-Improvement of the macro-economic environment along with improvement of the company's accounts receivables management
FULL LIST OF RATING ACTIONS
DTEK Energy B.V.
Long-term foreign and local currency IDRs: downgraded to 'C' from 'CCC'
Short-term foreign and local currency IDRs: affirmed at 'C'
National Long-term rating: downgraded to 'C(ukr)' from 'BBB-(ukr)'/Stable
Foreign currency senior unsecured rating: downgraded to 'C' from 'CCC', Recovery Rating 'RR5'
National senior unsecured rating: downgraded to 'C(ukr)' from 'BBB-(ukr)'
DTEK Finance B.V.
Foreign currency senior unsecured rating: downgraded to 'C' from 'CCC', Recovery Rating 'RR5'
DTEK Finance plc.
Foreign currency senior unsecured rating: downgraded to 'C' from 'CCC', Recovery Rating 'RR5'
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