The downgrade mainly reflects a change in how Scope Hamburg assesses government related entities under the methodology introduced on 2 May 2022.
The latest information on the rating, including rating reports and related methodologies, is available on this LINK .
Rating action
Scope Hamburg GmbH (Scope) has downgraded the issuer rating of Vitens N.V. to A-/Stable from A+/under review due to changes in methodologies. Simultaneously, Scope Hamburg has assigned a S-1 short-term debt rating and a senior unsecured debt rating of A-.
Rating rationale
Vitens’ business risk profile, assessed at A+, mainly benefits from the sector’s inherent stability through state-regulated operations and Vitens’ regional monopoly position as the largest drinking water distributor in the Netherlands. Vitens enjoys an overall low demand volatility in its supply area, strong visibility in revenues and sustainable cash flows. Further supportive factors include the reliable, well-established Dutch Drinking Water Supply Act which allows Vitens to recover all operating and investment costs incurred via regulated tariffs, and which is the basis for protective legislation against the privatisation of drinking water services in the Netherlands. Accordingly, supply concessions are only granted to government-owned companies. Overall, Scope thinks that Vitens pursues a low-risk strategy which adequately takes account of statutory regulations and responsibilities set out in the Dutch drinking water regulations, while ensuring that the company keeps its leading benchmark position in maintaining the lowest drinking water tariffs and operating costs across the Dutch drinking water sector (also considered positive ESG rating driver).
Vitens’ much weaker financial risk profile, assessed at BB-, constrains the standalone credit quality, and is mainly driven by the consistently high (and currently rising) debt levels and generally weak credit metrics as a result of high infrastructure funding needs and restricted profit margins (WACC regulation). Along with slightly increasing operating costs and rising investment volumes, Scope’s expectation is that Vitens’ credit metrics will slightly come under pressure over the medium-term, as a growing part of the planned rise in capex will need to be covered by additional financial debt, with Scope-adjusted-debt/EBITDA likely to exceed 7.0x sustainably. Increasing leverage is also likely to gradually weaken debt protection – calculated as EBITDA interest coverage – to around 5.0x by 2022. Nevertheless, for the regulatory period 2022-24 the regulator has agreed to lift the allowable WACC rate from 2.75% to 2.95% (as a result of a revised WACC calculation methodology), and fixed it for three years (before: two) in order to break the falling trend of recent years. A positive WACC development and a further reduction in funding costs provided, Vitens’ credit ratios have the potential to move towards their policy-induced long-term targets in Scope’s view.
Liquidity is increasingly affected by external funding needs but remains adequate in Scope’s view. While the combination of unutilised committed credit lines and expected operating cash flow is just about to cover expected capex and upcoming debt maturities, Scope deems Vitens’ liquidity to stay adequate as debt maturities are likely to be refinanced through new debt issues. To cover the sector specific high long-term funding needs, and for meeting all financial obligations in a timely manner, Vitens has a broad external funding base with preferred and sustained access to new funding such as shareholder loans, private placements, bank debt, EIB loans or commercial paper programs at sustainably low funding costs. Further headroom is provided by additional funding potential from dividend suspension or municipal shareholder loans. In compliance with the revised internal financial policy (solvency >30%; LT target >35%) Vitens has suspended its dividend distributions since 2020, and no further distributions are expected in the near future.
Vitens’ issuer rating incorporates a two-notch uplift on its standalone credit quality. This is based on Scope’s assessment of the ‘high capacity’ and ‘high willingness’ of the group of Dutch municipalities as Vitens’ sole owner to provide support if needed. While the group of municipalities have provided no implicit guarantees to bail out Vitens or cover its debt obligations if needed, Scope believes it would be highly willing to do so given Vitens’ high socio-economic importance (also considered positive ESG rating driver) as the provision of drinking water related services concern critically important areas such as public safety, public health, security of supply, affordability, disaster control or key environmental responsibilities. The willingness to support Vitens has been demonstrated in the past through the provision of municipal shareholder loans, dividend cuts and the signal to help providing further support over the next few years to bolster the upcoming infrastructure funding needs. The effect on the rating remains substantial as the company’s public shareholder structure is protected by law against privatisation, making a change highly unlikely, also with view to the high reputational risks.
Two drivers in this credit rating action are considered as ESG-related factors but none of the two factors mentioned has a substantial impact on the overall assessment on credit risk.
Outlook and rating-change drivers
The Stable Outlook reflects Vitens’ ability to cover the high upcoming infrastructure funding needs without its financial risk profile deteriorating significantly, as expressed by Scope-adjusted-debt/EBITDA of around 7.1x sustainably over the next two years. In Scope’s view, Vitens’ management and shareholders, but also regulators, appear committed to retaining the sectors current credit quality via refined financial policies and profit regulations.
A negative rating action is likely if Scope sees a deterioration of SaD/EBITDA to >7.5x or if EBITDA interest coverage falls to <4.0x on a sustained basis. A negative rating action may also be warranted if the shareholders demonstrated less willingness to provide support, or in the event of regulatory changes with an adverse impact on regulated profit margins (WACC regulation). However, as full public ownership is required by law, Scope deems adverse changes to the shareholder structure as highly unlikely.
A positive rating action could be warranted if the balance sheet strengthened, or the capex program received a revision, resulting in an expected Scope-adjusted leverage of around 6.0x on a sustained basis, while EBITDA interest coverage remains solid at around 5.0x.
In Scope’s opinion, however, a positive rating action is not in sight considering the large investment programme ahead.
The assigned S-1 short-term rating reflects the adequate overall liquidity and strong access to external funding through capital markets and bank debt, signalled by the frequent rollover of term loans, revolving credit facilities and the utilisation of other (private) debt instruments, but also the insufficient funds from internal sources to fully cover capex, which requires ongoing external funding looking forward.
Senior unsecured debt issued by Vitens N.V. has been rated A-, the same level as the issuer rating.
Long-term and short-term debt ratings
The assigned S-1 short-term rating reflects the adequate overall liquidity and strong access to external funding through capital markets and bank debt, signalled by the frequent rollover of term loans, revolving credit facilities and the utilisation of other (private) debt instruments, but also the insufficient funds from internal sources to fully cover capex, which requires ongoing external funding looking forward.
Senior unsecured debt issued by Vitens N.V. has been rated A-, the same level as the issuer rating.
Stress testing & cash flow analysis
No stress testing was performed. Scope Hamburg performed its standard cash flow forecasting for the company.
Methodology
The methodologies used for these Credit Ratings and/or Outlook, (Corporate Rating Methodology, 6 July 2021), are available on https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
Scope Ratings GmbH, Scope Ratings UK Limited and Scope Hamburg GmbH apply the same methodologies/models and key rating assumptions for their credit rating services.
Information on the meaning of each Credit Rating category, including definitions of default, recoveries, Outlooks and Under Review, can be viewed in ‘Basic Principles for Assigning Credit Ratings and Other Services 2 May 2022’, published on https://scopehamburg.com/seiten/Principles_20220502.pdf. Historical default rates of the entities rated by Scope Hamburg can be viewed in the ‘Credit Rating Transition and Default Study Feb. 2021’ at https://scopehamburg.com/seiten/Validation_Update_31Dec21.pdf. Also refer to the central platform (CEREP) of the European Securities and Markets Authority (ESMA): https://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml. A comprehensive clarification of Scope Hamburg’s definitions of default and Credit Rating notations can be found at https://scopehamburg.com/seiten/Principles_20220502.pdf. Guidance and information on how environmental, social or governance factors (ESG factors) are incorporated into the Credit Rating can be found in the respective sections of the methodologies or guidance documents provided on https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
The Outlook indicates the most likely direction of the Credit Ratings if the Credit Ratings were to change within the next 12 to 18 months.
Solicitation, key sources and quality of information
The Rated Entity and/or its Related Third Parties participated in the Credit Rating process.
The following substantially material sources of information were used to prepare the Credit Ratings: public domain, the Rated Entity and Scope Hamburg’s internal sources.
Scope Hamburg considers the quality of information available to Scope Hamburg on the Rated Entity or instrument to be satisfactory. The information and data supporting the Credit Ratings originate from sources Scope Hamburg considers to be reliable and accurate. Scope Hamburg does not, however, independently verify the reliability and accuracy of the information and data.
Prior to the issuance of the Credit Rating action, the Rated Entity was given the opportunity to review the Credit Ratings and/or Outlook and the principal grounds on which the Credit Ratings and/or Outlook are based. Following that review, the Credit Ratings were not amended before being issued.
Regulatory disclosures
These Credit Ratings and/or Outlook are issued by Scope Hamburg GmbH, Ferdinandstraße 29-33, D-20095 Hamburg, Tel +49 40 524724-170.
Lead analyst: Matthias Peetz, Senior Analyst
Person responsible for approval of the Credit Ratings: Werner Stäblein, Managing Director
The Credit Ratings/Outlook were first released by Scope Hamburg or its predecessor on 12 December 2014. The Credit Ratings/Outlook were last updated on 02 May 2022.
Potential conflicts
See www.scoperatings.com under Governance & Policies/EU Regulation/Disclosures for a list of potential conflicts of interest related to the issuance of Credit Ratings.
Conditions of use/exclusion of liability
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