Moody’s upgrades DTEK Energy rating to Caa2

Moody’s Investors Service upgraded on Sept. 5 the
corporate family rating of Ukraine’s leading coal and power producer DTEK Energy
(DTEKUA) to Caa2 from Ca, with a Stable outlook, the agency reported the same
day. The upgrade reflects significant progress in restructuring the group’s
debt, reductions in net debt and improvements in funds from operations, Moody’s
commented, also mentioning that 10% of its gross debt remains in default. The
company’s funds from operations to net debt ratio improved to 28% in 2018 (from
zero in 2015), the agency highlighted, also expecting that the ratio will
remain the same in 2019.

Moody’s said it sees the potential for further rating
increases amid an improved Ukrainian economy, positive developments in
Ukraine’s electricity market reform and “a favorable resolution of the NABU investigation”. If the
above mentioned trends worsen, Moody’s said it could downgrade DTEK’s rating.

Alexander Paraschiy: With this
action, Moody’s rates DTEK as being one notch below Ukraine’s sovereign. Most
likely, the negative difference reflects the risks for the holding from the
NABU investigation of DTEK employees’ involvement in the alleged Rotterdam Plus
conspiracy (which we see as minimal), uncertainties for DTEK fundamentals from
the new electricity market (which do not look significant), and the effect on
DTEK’s fundamentals from Ukraine’s “potential integration with the EU Emissions
Trading Scheme” (which might be material, but only in the long term). So
far, we see the DTEKUA bond as trading at too heavy a premium to other
Ukraine-related fixed income instruments, thus keeping our bullish view on the
bond.