S&P Puts Norway’s Statkraft and Statnett on Watch Negative

1 November 2002 – Standard & Poor’s Ratings Services said Thursday it placed its double-‘A’-plus/’A-1′-plus corporate credit ratings on Norway-based electricity generator Statkraft SF, and its triple-‘A’ long-term corporate credit rating on transmission grid operator Statnett SF on CreditWatch with negative implications.

The rating action is in response to the legislative changes proposed by the Norwegian government on Oct. 25, 2002, to withdraw the state guarantees for Norwegian state-owned utilities as of Jan. 1, 2003.

At the same time, the senior unsecured debt ratings of double-‘A’-plus on Statkraft and triple-‘A’ on Statnett were affirmed. The outlook on these ratings is stable.

The short-term ‘A-1’-plus corporate credit rating on Statnett was also affirmed.

Both Statkraft and Statnett are 100 per cent state-owned and currently have the legal status of “Statsforetak” (SF; state enterprise), meaning that they benefit from an ultimate state guarantee for all liabilities and they cannot go bankrupt. The objective of the government’s proposal is to comply with agreements with the EU on state aid. According to the proposal, liabilities incurred after Jan. 1, 2003, will no longer be guaranteed by the state, and normal bankruptcy procedures will be applicable to the companies.

“The stand-alone credit quality of Statnett and Statkraft is weaker than the current corporate credit ratings, which rely on the government guarantees,” said Standard & Poor’s credit analyst Andreas Zsiga.

The utilities’ corporate credit ratings are expected to be revised once parliament has voted on the government’s proposal, which is expected within the coming weeks.

“Approval of the proposal will lead to the long-term corporate credit rating on monopoly transmission system operator Statnett being lowered, potentially by up to two notches,” added Mr. Zsiga. “The rating on Statkraft would be lowered by, potentially, up to six notches.”

New unsecured debt issued by either company from Jan. 1, 2003, will likely be assigned the same rating as the corporate credit rating on the respective company.

Key factors for determining the future corporate credit ratings of both companies will be company strategy, including plans and focus of expansion, and the financial structure adopted. Furthermore, any implicit support from the government will be factored into the ratings, while also taking into consideration any legal restrictions that might exist on government support. In the medium term, new liabilities are expected to benefit indirectly from the guarantee provided to existing debt.

The proposal would ensure the ultimate guaranteed status of existing liabilities. According to the proposal, for debt incurred before Jan. 1, 2003, the Norwegian state would be obliged to cover liabilities that have fallen due within six months of a decision to wind up the enterprise or the opening of bankruptcy or similar proceedings. To some extent, this is an improvement on the existing legislation, according to which no such time limit is imposed.

“Importantly, the proposed changes do not alter Standard & Poor’s opinion that the existing liabilities have an extremely high likelihood of full ultimate recovery,” said Mr. Zsiga. “Furthermore, Standard & Poor’s expects that the strategic importance of the companies to the Norwegian power sector provides a strong incentive for the government to provide timely financial assistance if necessary.”

The rating distinction between Statnett’s and Statkraft’s existing senior unsecured debt continues to be based on the assumption that the government must evaluate the impact of any kind of support for Statkraft, given that it operates in a fully deregulated market.

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