Fitch keeps DTEREN B- rating, negative watch

Fitch Ratings reported on Nov. 20 that it is keeping
its Rating Watch Negative for DTEK Renewables’ (DTEREN) B- LT issuer default
rating in foreign currency. The negative watch reflects the poor payment
discipline of DTEK’s only customer, State Co Guaranteed Buyer, as well as the
deterioration of the Ukrainian economy.

Recall, Fitch downgraded its DTEK Renewables’
rating from B in June, also placing it on Rating Watch
Negative, which was triggered by a significant deterioration of Guaranteed
Buyer’s payment discipline since March and expectations about green energy
tariffs being lowered in Ukraine. Since then, the Ukrainian government signed a
memorandum with green energy producers, exchanging a cut in green tariffs for
the promise to reinstate excellent payment discipline since August and repay
the accumulated arrears by end-2021.

Later on, Ukraine’s parliament adopted a law on
lower green tariffs, also stipulating that the state budget will cover at least
20% green sources’ revenue.

As of Nov. 19, Guaranteed Buyer owed DTEK Renewables
EUR 113 mln for electricity supplied in March-November, which eroded the
company’s cash flow from operations, according to Fitch. This is an increase
from EUR 89 mln as of end-June and EUR 97 mln as of end-July. Fitch expects
that Guaranteed Buyer will be able to pay 50% of due payments in 2020 and 90%
in 2021.

Alexander Paraschiy: We see the
situation with payments to green energy producers is not critical in Ukraine.
After awful payments in March-July (12% of electricity is paid), Guaranteed
Buyer significantly improved its payment discipline, having fully paid its
green energy bills for August and September and 38% for October as of Nov. 23.

While the delay in the settlement of the monthly
bill is currently about 1.5 months, in our view, Guaranteed Buyer is paying enough
for DTEK Renewables to improve its liquidity position. Therefore, we do not
share Fitch’s concerns about DTEK Renewables’ liquidity and remain bullish
about DTEREN bonds yielding 12.9% to their maturity.