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FItch: Leverage of Georgian Water & Power LLC to recover in 2021

Business Materials 14 May 2020 14:06 (UTC +04:00)
FItch: Leverage of Georgian Water & Power LLC to recover in 2021

BAKU, Azerbaijan, May 14

By Tamilla Mammadova – Trend:

Fitch Ratings has revised the Outlook on Georgia- based Georgian Water and Power LLC's (GWP) Long-Term Foreign and Local-Currency Issuer Default Ratings (IDR) from Stable to Negative and affirmed the IDRs at 'BB-', Trend reports citing the Fitch's report.

"The revision of the Outlook to Negative reflects higher than expected investments during the last two years as well as the expected impact of the coronavirus pandemic and related economic crisis on the company's operations, including a drop in water supply volumes to legal entities and deterioration in collection rates. As a result, we expect leverage to remain above our rating sensitivity during 2020, but to recover in 2021 on the back of the expected increase in water tariffs," the report said.

As reported, the rating is supported by GWP's natural monopoly position, solid profitability, improving regulatory environment, reducing water losses, good receivables collection rates, asset ownership and low sector risk. This is offset by increased leverage resulting in reduced financial flexibility, with refinancing needed during 2020, Foreign exchange (FX) risk, worn-out water infrastructure, and a group structure with related-party transactions, albeit decreasing and on market terms.

"We anticipate GWP's funds from operations (FFO) net leverage adjusted for connection fees to remain elevated in 2019-2020, above our revised negative sensitivity of 3.5x, mainly due to ower than expected revenues from electricity sales, higher than expected investments, and depreciation of the Georgian lari. We have revised upwards our leverage rating sensitivities for GWP, reflecting the better track record of regulatory framework, improved operational environment (compared with our original assessment) and updated peer comparison," the Fitch noted.

According to Fitch, supply tariffs to households to increase slightly below 60 percent in 2021 and then to remain flat over 2021-2023, which is below management's expectations. Lower than expected tariff increase would pressure GWP's cash flows and likely result in a downgrade.

"GWP remains exposed to FX fluctuations, as around 40 percent of its debt at end of 2019 was denominated in foreign currencies, mainly euros. Although the company benefits from cheaper debt financing, we believe the significant exposure to FX fluctuations could put pressure on credit metrics in the event of significant adverse fluctuations in currency markets," the report said.

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