August 21, 2012 / 2:37 PM / 5 years ago

TEXT-S&P affirms Israel Electric 'BB+' rating, off credit watch

Overview
     -- The Israeli government has confirmed an expanded support package for 
Israel's electricity monopoly Israel Electric Corp. Ltd. (IEC) that includes 
an additional new Israeli shekel (NIS) 2 billion in debt guarantees.
     -- The guarantees will facilitate the debt issuance that IEC needs to 
complete to cover its remaining fuel costs between now and the end of 2012.
     -- We are therefore affirming our 'BB+' long-term foreign currency 
corporate credit rating on IEC and removing it from CreditWatch negative.
     -- The negative outlook reflects our opinion that there remains an 
element of execution risk in the new state support package, which aims to 
resolve IEC's funding gap in the near term, and support its financial and 
operational recovery in the medium term.

Rating Action
On Aug. 21, 2012, Standard & Poor's Ratings Services affirmed its 'BB+' 
long-term foreign currency corporate credit rating on Israel Electric Corp. 
Ltd. (IEC). At the same time, we removed the rating from CreditWatch, where it 
was placed with negative implications on April 5, 2012.

Rationale
The rating actions reflect our understanding that the Israeli government will 
expand its package of support measures to address the immediate liquidity 
crisis resulting from a dramatic escalation in IEC's fuel costs for its 
electricity generation. The escalation in costs follows a fuel crisis in 
Israel triggered by the cessation of natural gas from Egypt, which forced IEC 
to purchase more expensive fuels. 

In particular, we understand that the government will provide an additional 
new Israeli shekel (NIS) 2 billion in guarantees to facilitate new debt 
issuance that IEC needs to cover its remaining funding deficit between now and 
the end of 2012. The NIS2 billion of new guarantees will bring the total 
government-guaranteed debt that IEC raised in 2012 to NIS6.4 billion, out of 
total outstanding debt of about NIS52 billion.

The guarantees form part of a wider package of support measures that include 
tax breaks on fuel, the postponement of deposits into an emergency capital 
expenditure (capex) fund, and relief from IEC's environmental obligations. In 
our view, the overall support package demonstrates the government's previously 
stated commitment that it would fully support IEC in relation to the current 
fuel crisis.

We anticipate that IEC will report weak credit metrics in 2012 and potentially 
in the first half of 2013. This is because IEC has not been able to pass on 
the rise in fuel costs to consumers through tariffs on a timely basis, which 
has led to a rapid increase in debt. However, we anticipate that ratios could 
recover from 2013, due to the establishment of a new connection with the 
domestic offshore gas fields, and to tariff increases that the regulator has 
approved for 2012-2014, aimed specifically at recovering the additional fuel 
costs. 

A stabilization of the rating on IEC is conditional on the successful 
execution of the government's liquidity support package, and on a material 
strengthening in IEC's liquidity management, which we consider has been weak 
in recent years. Over the medium term, if liquidity management has 
strengthened and, in addition, we assess that debt coverage ratios are 
recovering on a sustainable basis to at least levels before the fuel crisis, 
there could be upside to the rating on IEC, in our view.  

We view IEC as a government-related entity (GRE). In accordance with our 
criteria for GREs, the rating on IEC reflects our opinion that there is a 
"very high" likelihood that the State of Israel would provide timely and 
sufficient extraordinary support to IEC in the event of financial distress. We 
base our assessment on IEC's:
     -- "Very important" role for Israel's economy, given its virtually 
unchallenged monopoly position and ownership of essentially all strategically 
important electricity distribution, transmission, and generation assets in the 
country. We anticipate some new competition in generation by way of 
independent power producers but, in our view, IEC's market share in this 
segment is unlikely to decrease to less than 80% of Israel's total capacity 
over the medium term; and
     -- "Very strong" link with the Israeli state, which owns 99.85% of IEC 
and is actively involved in defining IEC's strategy and approving its 
borrowing plans. Over the long term, we understand that Israel intends to 
partly privatize IEC, while remaining a major shareholder. 

We assess IEC's stand-alone credit profile (SACP) at 'b-', based on our 
assessment of the company's "fair" business risk profile and "highly 
leveraged" financial risk profile. IEC's "fair" business risk profile reflects 
its vertical integration and monopoly position, offset by its high exposure to 
regulatory risk. We consider that the company's weak liquidity management is 
the main constraint to its financial risk profile and, consequently, to its 
SACP. The SACP might otherwise be higher in light of historically satisfactory 
debt coverage ratios, notwithstanding the weak ratios in the current financial 
year. Large ongoing funding needs, especially during the current fuel crisis, 
and high financial leverage also constrain IEC's financial risk profile.

Liquidity
We assess IEC's liquidity as "less than adequate" under our criteria. We base 
this on what we view as the company's "weak" stand-alone liquidity position, 
combined with our view that the Israeli government has the ability and 
willingness to provide sufficient liquidity support to IEC in a timely manner. 

Our view of IEC's "weak" stand-alone liquidity profile reflects that the ratio 
of sources to uses of funds over successive 12-month periods has, under our 
criteria, been persistently and materially less than 1x. If the government 
support package to cover fuel costs is implemented as we anticipate, we would 
assess the ratio of sources to uses of funds at about 1x to the end of 2012, 
which is less than six months away. 

To achieve a "less than adequate" liquidity profile on a stand-alone basis, 
IEC needs to demonstrate that the ratio is at least 1x on a six-month basis, 
and that there is no material shortfall on a 12-month basis. In this respect, 
we note that IEC has significant debt maturities in February 2013. 

We understand from IEC that it is considering introducing measures to 
strengthen its liquidity management. These measures include the introduction 
of committed bank facilities, and/or increasing the minimum cash buffer to 
NIS2 billion, from NIS1 billion currently.

For the period August to December 2012, we understand from IEC that total uses 
of funds will be about NIS18.4 billion. This will be covered by the following 
sources, amounting to about NIS19.7 billion:
     -- An opening cash balance in August 2012 of NIS2.08 billion, which 
includes part of the proceeds from a NIS2.9 billion government-guaranteed debt 
issue in July 2012.
     -- NIS2.0 billion in a new debt issue that will be guaranteed by the 
government, including NIS1.5 billion to be raised in September 2012 and an 
additional NIS0.5 billion in November 2012.
     -- NIS733 million in funding for specific projects, to be raised in 
November 2012. We understand from IEC that it is close to signing bank 
agreements for this amount.
     -- NIS14.66 billion in net tariff collection. This includes the 
first-year tariff increase that the regulator has approved for 2012-2014.
     -- NIS0.23 billion of income from other sources.

The NIS18.4 billion funding requirement assumes that other components of the 
government support package, such as tax breaks and relief from environmental 
liabilities, are implemented as planned. In this respect, we assume that in 
the coming days, IEC will reach an agreement with the regulator to source at 
least NIS670 million by postponing transfers to the special-purpose emergency 
capex fund. The government has stated that it would provide an alternative 
funding solution should IEC and the regulator not reach an agreement on the 
postponement of transfers.

Outlook
The negative outlook reflects our view that there is an element of execution 
risk in the expanded support package for IEC. For example, the Israeli 
parliament still needs to approve the guarantees and IEC still needs to raise 
the debt in the market.

If the liquidity support package is not executed as we currently anticipate, 
we see the risk of a multi-notch downgrade of IEC. This is because we would 
likely lower both the SACP and the likelihood of extraordinary government 
support to reflect the government's failure to address the funding shortfall 
in a full and timely manner.

We would consider revising the outlook to stable if the guarantees and other 
components of the liquidity support package are executed as we anticipate in 
the immediate term. 

A stable outlook is also contingent on IEC's liquidity improving to a level we 
consider at least "less than adequate" on a stand-alone basis, or "adequate" 
including government support. In our view, an assessment of "less than 
adequate" stand-alone liquidity could result from IEC demonstrating that it 
can sustainably fund its liquidity needs at least six months in advance, with 
no material funding gaps in a 12-month period.

Related Criteria And Research
All articles listed below are available on RatingsDirect on the Global Credit 
Portal, unless otherwise stated.
     -- Methodology and Assumptions: Liquidity Descriptors For Global 
Corporate Issuers, Sept. 28, 2011
     -- Rating Government-Related Entities: Methodology and Assumptions, Dec. 
9, 2010
     -- Criteria Methodology: Business Risk/Financial Risk Matrix Expanded, 
May 27, 2009
     -- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008
     -- 2008 Corporate Criteria: Ratios And Adjustments, April 15, 2008

Ratings List
Ratings Affirmed; CreditWatch/Outlook Action
                                        To                 From
Israel Electric Corp. Ltd.
 Corporate Credit Rating                BB+/Negative/--    BB+/Watch Neg/--
  Senior Secured Debt                   BB+                BB+/Watch Neg



Complete ratings information is available to subscribers of RatingsDirect on 
the Global Credit Portal at www.globalcreditportal.com. All ratings affected 
by this rating action can be found on Standard & Poor's public Web site at 
www.standardandpoors.com. Use the Ratings search box located in the left 
column.

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