Wednesday 02, August 2017 by Georgina Enzer

Moody's takes actions on seven Omani GRIs

Moody's Investors Service, ("Moody's") has taken rating actions on seven Omani Government Related Issuers (GRIS):

Moody's downgraded the ratings by one notch and changed the outlook to negative from stable of:

  • Oman Power & Water Procur. Co. (S.A.O.C.) (OPWP)
  • Oman Electricity Transmission Company SAOC (OETC)
  • Oman Telecommunications Company S.A.O.G. (Omantel)
  • Dhofar Power Company SAOC (DPC)
  • Moody's affirmed the ratings and changed the outlook to negative from stable of:
  • Mazoon Electricity Company SAOC (MZEC)
  • Majan Electricity Company SAOC (MJEC)
  • Muscat Electricity Distribution Company SAOC (MEDC)

These actions follow the downgrade of Oman's sovereign rating to Baa2 from Baa1 and the change of outlook to negative from stable on 28 July 2017.

RATINGS RATIONALE

RATIONALE FOR DOWNGRADING THE RATINGS OF OPWP, OETC AND DPC BY ONE NOTCH; NEGATIVE OUTLOOK

The downgrade of OPWP's ratings to Baa2 from Baa1 and the change of outlook to negative from stable, follows Moody's rating action on the government of Oman given the close links between the two entities. Given the legal and regulatory framework, in combination with the government's exclusive ownership and low business risk profile, OPWP's baseline credit assessment (BCA) of baa2 remains on par with the credit risk assessment of the government of Oman. OPWP's intrinsic strengths include the (1) role the company plays in the country's power and water sector; (2) provisioning of timely financial support from the government as stipulated by law; and (3) exclusive government ownership of OPWP.

Downgrading OETC's issuer rating to Baa2 from Baa1 and changing the outlook to negative from stable aligns the company's corporate ratings with its baseline credit assessment (BCA) and with the government of Oman's rating. The baa2 BCA reflects (1) the track record, transparency and independence of the regulator; (2) the cost-recovery mechanisms of the regulatory framework; as well as (3) the low business risk profile of the electricity transmission activities and OETC's monopoly position in Oman's main regions. However, the baa2 also takes into account the (1) high capital investments requirements of the coming five years; (2) associated financing requirements and frequent access to third-party debt funding; and (3) shareholder distributions, albeit at fairly moderate levels.

In downgrading DPC's issuer rating to Baa3 from Baa2 and changing the outlook to negative from stable, the company's issuer rating is now aligned with its BCA and is one notch below the government of Oman's rating. The baa3 BCA, which is one-notch below the other DisCos, reflects (1) that DPC has the highest funding requirements (on a relative

basis) and the longest projected period before turning free cash flow positive; and (2) its smaller scale relative to MJEC, MZEC and MEDC which leaves DPC's financial profile more weakly positioned. The baa3 BCA also takes into account that DPC, unlike the other DisCos, currently does not legally benefit from the credit-enhancing mechanisms enshrined in the Sector Law as it is not wholly owned by the government.

RATIONALE FOR AFFIRMING THE RATINGS OF MJEC, MZEC, MEDC; NEGATIVE OUTLOOK

In affirming MJEC's, MEDC's and MZEC's Baa2 issuer ratings and changing the outlook to negative from stable, the companies' ratings are now aligned with their BCAs and the government of Oman's rating. The BCAs of the DisCos (including DPC) reflect: (1) the regulator's record of transparency and independence; (2) the cost-recovery mechanisms of the regulatory framework; as well as (3) the low business risk profile of the electricity distribution and supply activities and the companies'

regional monopoly positions in Oman. The BCAs remain constrained by the (1) high capital investment programmes over at least the 2017-21 cycle; (2) associated financing requirements and frequent access to third-party debt funding; and (3) shareholder distributions, albeit at fairly moderate levels.

The high support assumption for all DisCos manifests itself through (1) government ownership which is assumed to remain at a minimum 51 per cent after privatisation; (2) substantial government subsidies - that can be subject to revisions - to cover revenue shortfalls; and (3) the company's importance as (i) essential service provider; (ii) facilitator for the government's policy to diversify the economy away from hydrocarbons; and (iii) employer for Omani nationals.

RATIONALE FOR DOWNGRADING THE RATINGS OF OMANTEL BY ONE NOTCH; NEGATIVE OUTLOOK

The downgrade of Omantel's rating to Baa2 from Baa1 and the change of outlook to negative from stable, follows Moody's rating action on the government of Oman given the close links between the two entities.

Despite Omantel's strong standalone financial profile and robust fundamental credit quality, Moody's does not see the company being rated above the Government of Oman, given the company's total reliance on cash flow generation from operations in Oman. Omantel's baa2 BCA continues to be on par with the sovereign Baa2 rating, reflecting (1) the company's very strong standalone financial profile, evidenced by net debt/EBITDA of 0.4x and retained cash flow/debt of 142.2 per cent for the year-ended 31 December

2016 and its industry leading EBITDA margins in excess of 50 per cent; and (2) Omantel's ability to function largely independently of the Government of Oman in terms of day-to-day operations and financial decisions. Moody's expects the BCA to weaken, albeit while remaining strong, due to (1) the weakened operating environment that will translate to less revenue growth going forward; and (2) the increase in taxes and royalties that was made effective 2017.

WHAT COULD CHANGE THE RATINGS - UP/DOWN

OPWP

We expect OPWP to remain wholly government owned and thus a strategic vehicle for securing new electricity and related water capacity. As a result, OPWP's rating is expected to continue moving in sync with Oman's sovereign ratings.

OPWP's rating is derived from the strength of the sovereign, and a rating downgrade of the Sultanate of Oman could also lead to a downgrade of OPWP's rating. Any changes in the regulatory framework or government policies that create financial stress on OPWP could lead to negative rating pressure. In particular, Moody's assumes that OPWP will not absorb or otherwise finance any of the licensed suppliers' liabilities that may result from the reduction of government subsidies to the sector.

Market liberalisation measures, such as the privatisation of OPWP, would also require a reassessment of the company's rating position and could place downward rating pressure.

OETC

Given that the rating of OETC is aligned with that of the sovereign of Oman, an upgrade of the OETC's rating is linked to that of the Omani sovereign.

The rating could be lowered as a result of (1) a downgrade in Oman's government bond rating, (2) change in Omani government support and dependence assumptions, (3) a change of the regulatory framework or (4) a weakening BCA. A downgrade could occur if (1) net debt/fixed assets (three-year average) rises above 60 per cent; (2) FFO/net debt (three-year average) falls below 14 per cent; (3) FFO interest coverage (three-year average) drops below 3.6x.

DPC

An upgrade of the Baa3 long-term issuer rating or the BCA at this stage is unlikely. Given that the rating of DPC is linked to sovereign of Oman, an upgrade of DPC's rating should be linked to that of the Omani sovereign, for any potential upgrade of Sovereign. Positive pressure on the BCA could build through (1) the continued application of Article 67 of the Sector Law, even while the company is not wholly-owned by the government; or (2) less-demanding capex programme and reduced reliance on external funding (with regards to the BCA).

Ratings could be lowered as a result of a downgrade of Oman's government bond rating, change in Omani government support and dependence assumptions, (e.g. manifested through privatisation) or a weakening BCA.A downgrade could occur if (1) (CFO pre-WC + Interest) / Interest (three-year average) drops below 3.0x; (2) (CFO pre-WC -- Dividends) / Debt (three-year average) drops below nine per cent; (3) Debt/Capitalisation (three-year average) do not migrate to levels in the mid-50s ( per cent).

MJEC

Given that the rating of MJEC is aligned with that of the sovereign of Oman, an upgrade of MJEC's rating is linked to that of the Omani sovereign.

Ratings could be lowered as a result of a downgrade in Oman's government bond rating, change in Omani government support and dependence assumptions (e.g. manifested through privatisation) or a weakening BCA. A downgrade could occur if (1) (CFO pre-WC + Interest) / Interest (three-year average) drops below 4.5x; (2) (CFO pre-WC -- Dividends) / Debt (three-year average) drops below 15 per cent; (3) Debt/Capitalisation (three-year average) raises to above 55 per cent.

MZEC

Given that the rating of MZEC is aligned with that of the sovereign of Oman, an upgrade of MZEC's rating is linked to that of the Omani sovereign.

Ratings could be lowered as a result of a downgrade in Oman's government bond rating, change in Omani government support and dependence assumptions (e.g. manifested through privatisation) or a weakening BCA.

A downgrade could occur if (1) (CFO pre-WC + Interest) / Interest (three-year average) drops below 4.5x; (2) (CFO pre-WC -- Dividends) / Debt (three-year average) drops below 15 per cent; (3) ebt/Capitalisation (three-year average) raises to above 55 per cent.

MEDC

Given that the rating of MEDC is aligned with that of the sovereign of Oman, an upgrade of MEDC's rating is linked to that of the Omani sovereign.

Ratings could be lowered as a result of a downgrade in Oman's government bond rating, change in Omani government support and dependence assumptions, (e.g. manifested through privatisation) or a weakening BCA.

A downgrade could occur if (1) (CFO pre-WC + Interest) / Interest (three-year average) drops below 4.5x; (2) (CFO pre-WC -- Dividends) / Debt (three-year average) drops below 15 per cent; (3) Debt/Capitalisation (three-year average) raises to above 55 per cent.

OMANTEL

An upgrade of Omantel's issuer rating is unlikely to occur because we do not see the company being rated above the Government of Oman's sovereign rating, given that Omantel's free cash flows are all generated in Oman.

Downward rating pressure could occur if the Government of Oman's sovereign rating is downgraded. Similarly, Omantel's issuer rating could come under downward pressure if its inancial leverage as measured by debt/EBITDA exceeds 1.5x, likely resulting in a downgrade to its BCA. A retained cash flow/debt below 30 per cent could also exert negative pressure on the company's BCA. Any adverse government influence/inference with respect to Omantel's financial policies or operating strength could also lead to downward pressure on the company's rating.

LIST OF AFFECTED RATINGS:

Downgrades:

  • Issuer: Oman Power & Water Procur. Co. (S.A.O.C.) LT Issuer Rating, Downgraded to Baa2 from Baa1
  • Issuer: Oman Electricity Transmission Company SAOC -LT Issuer Rating, Downgraded to Baa2 from Baa1
  • Issuer: Lamar Funding Limited - Backed Senior Unsecured Regular Bond/Debenture, Downgraded to Baa2 from Baa1
  • Issuer: OmGrid Funding Limited - Backed Senior Unsecured Regular Bond/Debenture, Downgraded to Baa2 from Baa1
  • Issuer: Oman Telecommunications Company S.A.O.G. - LT Issuer Rating, Downgraded to Baa2 from Baa1
  • Issuer: Dhofar Power Company SAOC - LT Issuer Rating , Downgraded to Baa3 from Baa2

Affirmations:

  • Issuer: Mazoon Electricity Company SAOC - LT Issuer Rating, Affirmed Baa2
  • Issuer: Majan Electricity Company SAOC - LT Issuer Rating, Affirmed Baa2
  • Issuer: Muscat Electricity Distribution Company SAOC - LT Issuer Rating, Affirmed Baa2

Outlook Actions:

  • Issuer: Oman Power & Water Procur. Co. (S.A.O.C.) - Outlook, Changed To Negative From Stable
  • Issuer: Oman Electricity Transmission Company SAOC - Outlook, Changed To Negative From Stable
  • Issuer: Lamar Funding Limited - Outlook, Changed To Negative From Stable
  • Issuer: OmGrid Funding Limited - Outlook, Changed To Negative From Stable
  • Issuer: Oman Telecommunications Company S.A.O.G. - Outlook, Changed To Negative From Stable
  • Issuer: Dhofar Power Company SAOC - Outlook, Changed To Negative From Stable
  • Issuer: Mazoon Electricity Company SAOC - Outlook, Changed To Negative From Stable
  • Issuer: Majan Electricity Company SAOC - Outlook, Changed To Negative From Stable
  • Issuer: Muscat Electricity Distribution Company SAOC - Outlook, Changed To Negative From Stable

 

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