S&P keeping close eye on utilities’ access to debt

Access to liquidity will be key to companies staying afloat during the interruptions caused by the coronavirus outbreak, according to an expert from S&P, who said risks remain despite the great resilience shown by utilities.

Matan Benjamin, director of infrastructure ratings for the utility sector at S&P Global Ratings talked Utility Week through the major concerns for the sector and how firms can best weather the storm of uncertainty.

He said liquidity, changes in demand patterns and regulation are each pivotal to the stability of the sector but the uncertainty of the long-term effects of the virus on the economy remain.

“Utility companies have come under pressure, but we consider them to be relatively resilient to the effects of coronavirus given the essential service they provide and the regulated or long-term contracted nature of their activities,” Benjamin said.

“Utilities are implementing contingency plans to manage any disruption, deliver on their core responsibilities, and carry out essential operations.”

Benjamin explained that during periods of crisis, analysis is initially focused on companies’ liquidity position and their capacity to withstand the short-term pressure.

“In recent weeks, we have seen a number of utilities – including Thames and SSE – coming to the market and successfully issuing new debt to finance on-going operation and easing any potential pressure on their short-term liquidity position.”

Although there has been fluctuations and some debt issued at a premium price, the overall pricing remained “reasonable” and in-line with the weeks leading up to the outbreak, Benjamin said.

He explained that perception of investors remained important, because that would directly impact the availability of debt being issued to companies.

S&P’s indications show that companies in the utility sector will maintain a strong liquidity position and will be able to continue accessing new debt.

He said S&P continually monitors the long-term implications of the crisis on demand patterns and pricing as well as Sovereign risk.

“Our current base case is for gradual normalisation of industrial activity over the next few months. Our base-case scenarios are under constant revision as we continue to assess current economic conditions. We are looking at each company to monitor their liquidity position and how each company responds to the crisis.”

Another factor will be the change in demand patterns over the long term and how they differ from predictions made by S&P three months ago.

Expectations are that demand will increase in the coming months to return to the previously forecast level meaning only a short-term change to the market that would not change S&P’s overall view.

“There have been many rating actions on companies in more exposed sectors such as retail, oil and gas and transportation, but mostly on non-investment grade companies.”

He explained that while investment-grade issuers typically can withstand considerably more macro and event-driven stress than their speculative-grade counterparts, the coronavirus pandemic and oil price shocks have resulted in a marked increase in “fallen angels”.

Fallen angels are issuers with outstanding debt that have been downgraded to speculative grade (‘BB+’ and lower) from investment grade (‘BBB-‘ and higher).

The strong regulation that governs the sector puts companies in a healthy position because the revenue is protected and shortfalls can be recuperated in future years, Benjamin said. He went on to say this meant there was transparency and stability in forecasting the revenue.

He added that bad debt poses a risk for longer-term, especially for the non-household utility providers who will suffer greater revenue losses, but the actions of the regulators should allow businesses to recover the deficits over time.

The duty to protect customers comes first but the actions to safeguard the non-domestic markets has shown the balance that the regulatory bodies are striving to strike.

Benjamin said the proactive moves by Ofgem and Ofwat have been well balanced to protect the market as well as customers. Ofwat is consulting on the necessary steps to implement a longer-term solution for the non-domestic water market, with a decision expected by the end of April.

Furthermore, the actions of government in facilitating market activity and ensuring the availability of liquidity lessens the exposure.

In its recent report on the wider performance of utilities across EMEA, the ratings agency observed that, despite the disruption to normal life caused by the pandemic, it has not downgraded any utility in the region. Rather, a number of utilities saw their outlook revised to negative, primarily due to merchant power exposure and earnings’ downside risk.

“These companies have a degree of flexibility to adjust costs, investments, and dividends to protect their creditworthiness,” said Pierre Georges, senior director, EMEA Utilities at S&P. “Capital markets remain open to the sector, and some landmark transactions have been completed over the recent weeks.”

Despite the severe disruption utilities are better placed than many industries to withstand the downturn, however Benjamin said the situation was far from comfortable in view of the risks and uncertainty.

“Overall, we expect that the utility sector will be more resilient to the situation, however this view could change depending on how long the crisis persists,” he said.