September 10 (SeeNews) - S&P Global Ratings said it has affirmed its 'B+' long-term issuer credit rating on Croatian multy-utility Zagrebacki Holding (ZGH), with a stable outlook.
"The rating action reflects our expectations that ZGH's debt will remain high, with little improvement in 2019-2020 compared with 5.5% FFO-to-debt and 11x debt-to-EBITDA in 2018," the rating agency said in a statement late on Monday.
"The affirmation also reflects our view that the company will not face any material liquidity disruptions thanks to ongoing support from its owner, the city of Zagreb, because we expect it to continue rolling over its large short-term bank lines," it added.
On the other hand, the stable outlook reflects S&P's belief that ZGH's funds from operations (FFT)-to-debt ratio remaining at 5%-12% with no significant increase in debt and no further material changes to the group's structure.
In addition, thanks to the support of the city of Zagreb and the availability of short-term bank loans, ZGH's liquidity is not under any immediate threat.
The rating agency also said:
"Following increasing operating expenses, continued pressure on gas supply and sales revenues, and higher planned staff expense for the waste disposal business over 2019-2020, we do not expect performance to improve in 2019-2020.
After the divestment of its public transport companies in 2018, Zagreb Electric Tram and Zagreb Fairs, ZGH's EBITDA and debt have dropped by about 13% and 10%, respectively. Assuming no further material changes in the group structure, we forecast EBITDA at 450 million-500 Kuna (HRK) million over 2019-2020. We expect debt to be broadly stable, at HRK4.6 billion compared with HRK4.9 billion at year-end 2018, due to broadly neutral discretionary cash flow forecast in 2019-2020.
We believe the likelihood of ZGH receiving timely and extraordinary support from Zagreb remains very high, so we add a two-notch uplift to the 'b-' SACP.
The city of Zagreb is the company's full owner, guarantees its bonds, and significantly influences key strategic decisions. In addition, ZGH has a very important role for the city, because they are monopoly providers of critical city infrastructure services (gas distribution and supply as well as water treatment and waste recycling).
We will continue to monitor whether the gas sector liberalization, as well as the increasing focus on investments in the cleaning and waste segment to comply with EU guidelines on waste management, would affect ZGH's strategy and role for the city's economy, or the government's policy regarding the utility. We continue to see ZGH as a relatively autonomous business, and factor in both positive and negative sides of its relationships with the city, including ongoing subsidies and guarantees, a weak regulatory environment, and the city's tolerance to relatively high debt at the utility level.
The stable outlook on ZGH reflects that on Zagreb and, ultimately, on Croatia. It also reflects our expectation of no significant changes in the group structure, the city's policy to support the company, or ZGH's stable operating performance. We expect FFO-to-debt of 5%-12%, no material increase in debt and no deterioration in liquidity, given ongoing support from the city and continuing rollover of short-term bank lines.
A downgrade could follow a material deterioration in liquidity, which is not our base-case scenario as long as support from the city continues.
We could also lower the rating if we downgrade the city to 'BB-' or we perceive a material weakening of government support, for example, due to unexpected changes to the group structure or the city's policy in the gas or waste management sector.
An upgrade could follow us upgrading Zagreb to 'BB+', which is not in our base-case scenario given the stable outlook on the city. We view an upgrade because of ZGH's stand-alone credit metrics in the next two years as unlikely. We would consider raising the ratings if we see a track record of improved performance with FFO-to-debt sustainably above 12%, more predictable financial results, at least neutral free operating cash flow, and prudent liquidity management, assuming no change in ongoing and extraordinary support from the city government
ZGH is a diversified conglomerate created in 2006 to streamline control over 22 existing municipal companies and raise external funding for the municipal investment program.
ZGH is 100% owned by the City of Zagreb and is the largest corporate employer in Croatia.
The group includes 15 branches and eight affiliates owned 100% and one affiliate owned 51% by ZGH. These divisions and subsidiaries have quasi-monopolistic positions in providing essential municipal services such as gas supply and distribution, water supply and sewerage, road maintenance, waste disposal, and real estate projects."