Fitch assigns Bulgarian Energy Holding's EUR 500mn debut bond issue 'BB+' rating

By bne IntelliNews November 6, 2013

Fitch Ratings has assigned Bulgarian Energy Holding's (BEH) debut EUR 500mn eurobond issue a final foreign currency senior unsecured rating of 'BB+', the rating agency said on Nov 5. The bonds carry an annual coupon of 4.25% and mature in 2018. The bonds' rating mirrors BEH's long-term foreign and local currency issuer default ratings (IDR) of 'BB+'/stable outlook.

The recent bond issue, together with the repayment of some subsidiary debt, is expected to increase the share of holding company's debt in total group debt to 58% by year-end from 30% in mid-2013, and the ratio of prior-ranking debt (the debt of subsidiaries who do not guarantee BEH) to consolidated EBITDA will decrease to about 1.2x from 1.5x - well below the threshold of 2x when Fitch would consider rating unsecured debt one-notch lower.

Furthermore, the absence of upstream guarantees from material subsidiaries for the EUR500m bond issue at the holding company level was another key driver for BEH's unsecured debt rating. The group plans to raise debt at the BEH level and repay some subsidiary debt, thus over time mitigating structural subordination within the group.

The fact that the bond documentation includes i) a negative pledge clause monitoring the creation of secured debt, and ii) a change of control put option and also a cross-default provision related to BEH and its material subsidiaries also influenced Fitch's rating.

Meanwhile, BEH's long-term IDRs reflects its dominant position in Bulgaria's electricity and gas markets and its strong links with the Bulgarian state.

Developments that could lead to negative rating action include failure to maintain sufficient liquidity, negative change in the sovereign rating, weakening links between BEH and the state and funds from operations net adjusted leverage exceeding 3x on a sustained basis. Positive rating action could be prompted by stronger corporate governance, progress in the liberalisation of the local electricity market and funds from operations net adjusted leverage below 1.5x on a sustained basis.

BEH's EUR 500mn eurobond issue took place on October 31, luring more than EUR 1.2bn in bids. The average yield reached 4.287%, equivalent to a 320 basis point spread over mid swaps. This spread was revised in from guidance of 325bps area over mid-swaps announced earlier on Thursday, Reuters reported. Orders were collected first in the low 300s area but concerns about Bulgaria's political outlook and the the debut nature of the transaction pushed the premium up, Reuters reported, quoting unnamed banker.

BEH said in April it was looking to borrow funds to pay back the EUR 195mn bridge loan Citigroup provided it earlier this year to cover a maturing loan from BNP Paribas extended to one of the holding's subsidiaries and use the rest for capital expenditures. At the end of October, Bulgaria and Russian gas monopolist Gazprom agreed to launch the construction works on the Bulgarian section of the South Stream pipeline. Bulgaria will cover its share of the project's costs through BEH. The latter will finance part of the costs through own funds and another part via a 22-year EUR 620mn loan from Gazprom.

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