Fitch Ratings affirmed the Long-Term Issuer Default Rating (IDR) of Uzbekistan's Regional Electrical Power Networks (Regional Networks) at 'BB-' with a stable outlook. This rating aligns with Uzbekistan’s sovereign rating, as most of Regional Networks' debt is guaranteed by the state.
Fitch has downgraded Regional Networks' Standalone Credit Profile (SCP) from 'b-' to 'ccc'. This revision is due to persistent liquidity issues, a short-term debt maturity profile, and expected weak funds from operations (FFO). The anticipated breach of the previous negative sensitivity threshold of 7x for FFO leverage in 2024-2026 is a result of unfavourable tariff decisions that have reduced the company's margins. Despite these challenges, the SCP reflects Regional Networks' leading position in Uzbekistan's electricity distribution market.
Key rating drivers
Regional Networks' rating is closely tied to Uzbekistan's, given that over 90% of its debt was state-guaranteed at the end of 2023. Fitch considers loans from international financial institutions, on-lent by the Ministry of Finance, equivalent to government guarantees. A decrease in state-guaranteed debt below 75% of the total could lead to a downgrade under Fitch's Government-Related Entities (GRE) Criteria.
The company's revised SCP reflects poor liquidity and expected FFO leverage exceeding 7.0x during 2024-2026, compared to 5x in 2023 and 3.8x in 2022. The weak profitability is influenced by a regulatory environment characterized by low transparency and significant foreign exchange (FX) mismatches between cash flows and debt.
In 2023, Regional Networks deferred payments on certain loans amounting to UZS 0.5 trillion (6% of total debt), triggering a cross-default that reclassified UZS 7.2 trillion (around 80% of the debt) as payable on demand. By mid-2024, the company secured agreement from state creditors to avoid immediate actions on missed payments and refinanced most debt maturities to 2025.
The company faces challenges from adverse regulatory decisions, including a forecasted 44% increase in purchase tariffs for electricity in 2024, which is expected to significantly impact its margins. The regulatory environment remains problematic due to its lack of transparency and high political risk.
Regional Networks also faces high foreign-currency risk, with 78% of its debt denominated in US dollars while its revenues are primarily in Uzbek soum. The company plans to fund its ambitious capital expenditure program of around UZS 3.2 trillion ($246mn) annually through external loans, contributing to anticipated negative free cash flow (FCF) through 2026.
The rating of Regional Networks is consistent with Uzbekistan’s sovereign rating, similar to other state-backed entities. However, the company’s business profile is less favourable compared to some regional peers due to a less advantageous regulatory framework and higher FX exposure.
Rating sensitivities
Positive triggers: An upgrade of the sovereign rating or improvements in the regulatory framework, financial profile, and liquidity could positively affect the SCP.
Negative triggers: A downgrade of the sovereign rating or a decrease in state-guaranteed debt below 75% of total debt could lead to a negative rating action.
At the end of 2023, Regional Networks had cash and cash equivalents of UZS 0.3 trillion against short-term debt of UZS 8.3 trillion. The company has extended most short-term maturities to 2025 and will continue to seek refinancing with state-related creditors. External financing remains critical for its capital expenditures.
Regional Networks is a major player in Uzbekistan’s electricity distribution sector, purchasing electricity from Uzenergosotish and distributing it to end customers. The company employs approximately 25,000 staff and manages around 60 TWh of electricity annually.
ESG considerations
Regional Networks holds an ESG Relevance Score of '4' for Financial Transparency due to delays in IFRS account publication and a lack of interim reporting, which negatively impacts the credit profile.
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