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Following the upgrade of the long-term foreign currency sovereign credit rating on the Republic of Romania to ‘BB’, Standard & Poor’s Ratings Services has raised its rating on the US$200mn and US$120mn notes issued on a fiduciary basis by JPMorgan Bank Luxembourg SA for SC Termoelectrica SA to ‘BB’. JPMorgan issues the notes on a fiduciary basis to fund loans made by it to Termoelectrica and 18 thermal power plants.

“The rating on the notes is based on the unconditional and irrevocable guarantee by the Republic of Romania (foreign currency BB/Positive/B) of the due payment of principal and interest on the loans to the fiduciary, with the fiduciary using the proceeds of principal and interest payments from either the borrowers or guarantor to pay the notes’ coupons and redemption amounts,” says Standard & Poor’s credit analyst Konrad Reuss. “If Standard & Poor’s were to upgrade the long-term foreign currency sovereign credit rating on Romania again, then the rating on the notes would be raised accordingly.”

Termoelectrica is 100%-owned by the Republic of Romania and is not slated for full privatisation in the near term. Termoelectrica is Romania’s main producer of electric power and thermal heat, with a current market share of nearly 55% of the country’s total electricity production and just above 20% of its heat output. The company is stepping up its investment spending to boost efficiencies and raise its environmental profile to EU standards – a key objective in the Romanian government’s EU accession plans.
Termoelectrica was established as an independent joint-stock company in August 2000 as part of the ongoing restructuring of Romania’s power sector and has only a very short track record of independent operations and financial performance. The company’s financial performance is weak, with a negative cash flow and operating profit. Operating losses amounted to about US$932mn or 75% of sales in 2001, mainly due to continued poor payment discipline in the energy sector, as well as Termoelectrica’s inability to fully pass on rising oil and gas prices to its corporate and household customers. Termoelectrica’s indebtedness is moderate, with a debt-to-capital-ratio of 33%. Of the company’s US$470mn total debt, a substantial part was inherited from the former Romanian National Power Company CONEL and is also guaranteed by the government.

The sovereign credit ratings on the Republic of Romania are supported by the strong competitiveness of the economy, stemming from ongoing restructuring and modernisation, and resulting in continued robust growth driven by exports and investment. The ratings are also supported by conservative fiscal and monetary policies, and strong support for EU accession, which is providing an anchor for prudent policymaking and an incentive for structural reforms.

Nevertheless, the sovereign credit ratings remain constrained by structural economic distortions, most notably in the state-owed energy sector, despite recent price adjustments. The ratings are also constrained by the challenge of further reducing inflation, and by the persistence of strong vested interests, patronage, and corruption.
The outlook on Romania is positive, reflecting Standard & Poor’s opinion that there are good prospects for sustained restructuring and modernization of the economy during the next few years.

“The long-term ratings on Romania could be raised within the next couple of years if financial discipline and structural reforms continue,” says Reuss. “In particular, more progress on income policies in ailing public sector enterprises is crucial, while the government needs to speed up the liquidation or sale of a number of large loss-making companies. More progress on restructuring the large and inefficient energy sector could also help to further reduce inflation, improve resource allocation, and accelerate the transition to market-based economic structures.”