Fitch affirms Eurohold Bulgaria at 'B', outlook stable
Summary
Fitch expects EBITDA net leverage to increase to on average 5.3x in 2024-2025 on normalising EBTIDA, but for it to remain below our previous forecasts and comfortably within our rating sensitivities.Relationship with Major Shareholder: Eurohold is majority-owned by Starcom Holding AD (50.08% at end-2023). Based on our Parent-Subsidiary Linkage (PSL) Criteria, we assess legal ringfencing and access and control as porous, which means that Eurohold may be rated up to two notches above the parents consolidated profile. Euroholds debt service capacity is contingent on dividend income from intermediate holding companies and operating subsidiaries (assuming covenant compliance) and it does not have direct access to their underlying operating cash flows.Corporate Governance Limitations: The rating reflects Euroholds complex group structure, large related-party transactions and lower financial transparency than at its EU peers, including qualified audit opinions for 2020-2022 stemming from a conflict between the group and the Romanian regulator Autoritatea de Supraveghere Financiara, for which Euroholds subsidiary Euroins Insurance Group has officially launched an arbitrage procedure.Eurohold is smaller than other rated central European utilities such as Energa S.A. (BBB+/Stable) and Bulgarian Energy Holding EAD (BB+/Positive), although it is one of the largest utilities in Bulgaria. However, Eurohold operates in a more volatile and less transparent regulatory environment than Energa, has higher leverage and its results are less predictable with some corporate governance limitations.Fitchs Key Assumptions Within Our Rating Case for the Issuer:- The new regulatory period starting from July 2024 in broad continuity with the current framework- Return rate in distribution segment on average at 6.5% in 2024-2028- Energy segment EBITDA to decrease in 2024-2025, following tariff adjustment in distribution, and increasing from 2026 following market liberalisation- Consolidated EBITDA (excluding the insurance business) normalising at an average BGN210 million annually in 2024-2027- Cumulative net capex in 2024-2027 of about BGN750 million, with capex focusing on network infrastructure development- The recovery analysis assumes that Eurohold would be reorganised as a going concern (GC) in bankruptcy rather than liquidated- GC EBITDA of BGN184 million is 35% lower than 2023 EBITDA, reflecting expected normalisation of profitability- Fitch applies a distressed enterprise value (EV)/EBITDA multiple of 6.5x to calculate a GC EV, reflecting its large share of regulated earnings, but also a volatile and less transparent operating environment-With these assumptions, our waterfall-generated recovery computation (WGRG) for the senior unsecured notes of Eurohold is in the RR4 band, indicating a B instrument rating. The WGRC output percentage on current metrics and assumptions is 37%.Factors That Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade:- An improved consolidated group financial profile (excluding the insurance business) with net debt below 4.5x EBITDA on a sustained basisFactors That Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade:- Net debt of the consolidated group (excluding the insurance business) above 6x EBITDA on a sustained basis, for instance due to a more aggressive financial policy, higher distributions to shareholders and lower profitability and cash generation- Significant weakening of the business profile with lower predictability of cash flow may lead to tighter leverage sensitivities or a downgrade- Substantial deterioration of the credit profile of Euroholds majority shareholderImproving, but still Weak Liquidity: The rating is constrained by weak liquidity at the Eurohold holding company level.
Funding
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