“This sudden filing for insolvency by a government-owned entity reflects negatively on the sovereign’s credit profile with precedent-setting uncertainty for creditors and other commercial partners of other Romanian state-owned entities,” the ratings agency said.
In a surprising move last week, Romania’s largest energy producer Hidrolectrica filed for insolvency, saying it was unable to cover its short- and medium-term debt to banks and other creditors. The company said it would undergo reorganization, but it wouldn’t sell any assets or fire its staff.
Following the move, Moody’s cut Hidrolectrica’s ratings by four notches to B2, citing increasing risks of payment default.
Over the past year, Hidroelectrica’s credit profile deteriorated as drought hampered hydroelectricity output and operating costs rose, Moody’s noted.
In addition, the company was under pressure from the government’s multilateral creditors to renegotiate several long-term electricity sales contracts that, by offering buyers lower-than-market prices, contributed to declining profitability.
“It is unclear how the declaration of insolvency will affect these contracts, or the company’s debt repayments, which are owed mostly to multilateral development banks and some private commercial banks,” Moody’s said.
Hidrolectrica said that it would respect its contracts during the insolvency and restructuring process, which it expects to last for about a year and a half.
“However, until the company or the government stipulates exactly how creditors will be paid both state guaranteed and unguaranteed debt, the process of insolvency raises default risk and is credit negative for the company,” the agency said.
Hidrolectrica’s net profit dropped to 6.4 million lei (EUR1.4 million) in 2011, from over RON292 million a year earlier. The company had short-term debt worth RON2.6 billion at the end of 2011, up from RON1.7 billion in the previous year, while long-term debt was RON1.5 billion.
According to Moody’s, even if creditors are ultimately repaid, the insolvency increases the chances that the government will have to pay around EUR70 million of the company’s debt.
“The amount is not very large relative to the government’s own debt of $58 billion, but Hidroelectrica’s total debt, which we estimate at approximately $725 million, is a significant contingent liability for the government if the government decides to extend credit support to the company during the period of insolvency,” the rating agency said.
Additionally, the insolvency filing will delay the government’s plans to sell a 10% stake in Hidroelectrica this year as agreed upon under a 2011 EUR5 billion precautionary stand-by agreement with the International Monetary Fund and European Union.
“This delay exemplifies Romania’s operating environment uncertainty, which is a key reason why privatization is unsuccessful there,” the report noted. “It could further diminish the market’s reception of future asset sales, which are not only integral to Romania’s agreements with multilateral creditors, but also to the government’s effort to improve operating efficiency in state-owned enterprises via private-sector participation.”