Fitch Affirms MWiK's Revenue Bonds at 'BBB-', Outlook Stable
The revenue bonds' rating incorporates MWiK's low risk business profile with stable and regulated revenues and effective monopoly on an essential public utility service. The bonds' rating also takes into account the recent acquisition of an organised business unit of Spolka Wodna Kapusciska (SWK) - a wastewater treatment plant. In our view, the acquisition will lead to a slower than originally expected reduction in MWiK's financial leverage but should improve the company's business profile in the long term.
The rating continues to reflect the security package for revenue bondholders, including 12-months debt service liquidity accumulating on the coupon account, and the City of Bydgoszcz's (BBB/Positive) obligation under the municipality support agreement to inject cash into MWiK should the revenue bonds' debt service coverage ratio (DSCR) fall below 1.2x. The rating is constrained by the lack of a formal framework for rain water sewage remuneration.
KEY RATING DRIVERS
Water and Wastewater Tariffs
MWiK's combined water and wastewater tariff in 2015 remained unchanged from the 2013 and 2014 level. However, the introduction of the fixed availability fee in 2013, which currently accounts for approximately 10% of MWiK's revenue, improved the company's credit profile. MWiK expects the combined water and wastewater tariff will be broadly stable in 2016-2018.
Acquisition of SWK
In April 2015 Chemwik, a subsidiary of MWiK, signed an agreement to acquire an organised business unit of SWK, which treats approximately half the municipal sewage collected in Bydgoszcz (the remaining half was already treated by MWiK's Fordon plant). The acquisition of SWK ends a long period of uncertainty related to the transaction. It will also resolve the problems in cooperation between MWiK and SWK, which will be positive for MWiK's business profile in the long term. However, in the short term, the acquisition will be a challenge for MWiK as SWK needs substantial environmental and modernisation investments. The acquisition and prospective capex are to be financed from MWiK's own funds in the form of equity injections and intercompany loans to Chemwik.
In our view, MWiK's financial profile has limited headroom for additional cash outflows. Cash on the balance sheet and the expected final payment of the EU grant are sufficient to cover the expenditures related to SWK, but MWiK's leverage will overall decrease slower than originally anticipated.
Rain Water Tariffs
No final decisions have been taken yet with respect to the introduction of rain water tariffs in Bydgoszcz as well as the potential contribution in kind to the rain water sewage system from Zarzad Drog Miejskich i Komunikacji Publicznej w Bydgoszczy (ZDMiKP) to MWiK. The maintenance costs of the rain water sewage system already owned by MWiK can be covered from ad-hoc capital increases by the City of Bydgoszcz or if there is no capital increase, from MWiK's own funds. No formal framework for the rain water sewage remuneration in Bydgoszcz and related uncertainty is negative for MWiK's credit profile.
Completion of MWiK's Core Capex Programme
Completion of the BSWiK I and BSWiK II capex projects and elimination of funding risk is positive for the revenue bonds' rating. In 2014 MWiK received PLN24m as part of the tail-end payment from EU subsidies granted to finance the BSWiK I project. The company expects to receive the tail-end payment with respect to the BSWiK II project of PLN42m in 2015.
DSCR Affected by Partial Bond Redemption
MWiK plans to redeem part of the revenue bonds in 2015 (originally planned in 2014) with proceeds from the tail-end payment from EU subsidies as well as accrued cash. We do not include redemption in our rating case as MWiK might decide to spend the funds on other projects. We note that redemption of the bonds would help keep the DSCR above 1.2x, especially after starting servicing the second tranche of revenue bonds in October 2015. In addition funds from operations (FFO) net adjusted leverage would likely stay below 4x, providing a positive rating driver. Under the municipality support agreement, the city would be obliged to support MWiK if the covenanted DSCR fell below 1.2x.
KEY ASSUMPTIONS
Fitch's key assumptions within our rating case for the issuer include:
- No significant changes to water and wastewater tariffs over the next four years (continuation of cost-reflected tariffs)
- Stable water and wastewater volumes
- Introduction of rain water tariffs or regular equity injections to cover costs of MWiK's existing rain water asset base
- Modernisation capex at SWK covered from MWiK's own funds with limited expenditure on MWiK's existing asset base
- Inflow of EU grants in the amount of PLN42m in 2015
- No bond redemption with full amount of revenue bond and interest in line with the original repayment scheme
RATING SENSITIVITIES
Positive: Future developments that could lead to positive rating action include:
- FFO net adjusted leverage below 4x on a sustained basis coupled with a DSCR comfortably above 1.2x
- Capex requirements in the newly acquired SWK in line with MWiK's expectations
- Development of a predictable remuneration framework in the rain water sewage system
Negative: Future developments that could lead to negative rating action include:
- Increase in FFO net adjusted leverage to above 5x and/or decrease of the covenanted level of the DSCR below 1.2x on a sustained basis
LIQUIDITY AND DEBT STRUCTURE
At YE2014, MWiK's liquidity was ample. Short-term revenue bond and loan liabilities amounted to PLN55m. Total cash was PLN175m, including debt service liquidity accumulated on the coupon account of PLN52m, proceeds from revenue bond of PLN23m (earmarked for capex) and other cash of PLN100m.
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