Bloomberg News

European Utilities Face Debt-Rating Downgrades, Moody’s Says

November 16, 2011

Nov. 16 (Bloomberg) -- European utilities may see their average ratings fall to the lowest investment-grade range, raising borrowing costs, as they carry too much debt relative to their current level, according to Moody’s Investors Service.

A reduction to Baa ratings, the three lowest investment grades on the Moody’s scale, would drive up costs and could limit opportunities for companies, Senior Credit Officer Helen Francis and Infrastructure Finance Managing Director Monica Merli wrote in a report from London today.

“Despite already taking measures to defend single-A ratings, the financial profiles of the largest unregulated European utilities remain under pressure,” Francis wrote.

European power and network companies need to spend as much as 900 billion euros ($1.3 trillion) by 2020 to meet European Union climate change targets, according to Citigroup Inc. The 27-nation European Union aims to more than double the share of energy from renewable sources, including wind and solar power, to an average 20 percent by the end of the decade.

“The sheer scale of investment needs for the European utility sector, much of which is directed by government policies, dwarfs those of other sectors,” Francis said.

Meeting EU targets means companies need to maintain and even increase investment programs. Utilities may need to revise capital structures and corporate finance policies, to protect their ratings, the analyst said.

Since the start of the financial crisis in 2008, utilities have remained focused on protecting their credit profiles, Societe Generale SA analyst Herve Gay said in a Nov. 14 note. Companies with a “volatile” credit trend over the next six months to a year include Dong Energy A/S, Edison SpA, Statkraft AS and Fortum Oyj, he said. Utilities are a safer investment than sovereign debt or financial institutions, he added.

Company Ratings

Dong Energy is rated Baa1 at Moody’s, the third-lowest investment grade, while Edison is two steps down at Baa3. Fortum carries an A2 rating, the fifth-lowest assessment.

“Utilities will have to intensify their effort to offset potential sovereign-induced rating pressure as well as challenging asset disposals and a weakening of their business risk profile following the disposal of regulated networks and the development of higher growth markets,” Gay said.

--Editors: Ana Monteiro, Tony Barrett

-0- Nov/16/2011 11:26 GMT

To contact the reporter on this story: Kari Lundgren in London at klundgren2@bloomberg.net

To contact the editor responsible for this story: Will Kennedy at wkennedy3@bloomberg.net


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