Fitch downgrades DTEK Energy rating to C, outlines further downgrade

Fitch Ratings reported on Mar. 31 that it has
downgraded its rating of the DTEK Energy (DTKUA) Eurobond to C from B-. The
downgrade “indicates that default is imminent” after DTEK Energy announced on Mar. 27 that it is not going to pay
on time interest on its loans and bonds, due on Mar. 31 and Apr. 1,
respectively. The non-payment of bank interest will result in a downgrade to
RD, Fitch announced. Fitch analysts expect that DTEK Energy’s financials will
deteriorate in 2020 due to decreased power generation and lower achieved power
prices. At the same time, Fitch expects DTEK’s generation will increase
slightly and its power price will improve at single-digit rates in 2021-2022.

Alexander Paraschiy: The first
quarter of 2020 was indeed challenging for DTEK Energy, as the average price of
electricity at the wholesale market was rather weak (about UAH 1,360/MWh, which
is 29% less yoy and about 4% less compared to a weak fourth quarter of 2019).
This, as well as an expected decline in demand for power in Ukraine due to
quarantine measures, are likely to have triggered DTEK’s decision to initiate
debt restructuring talks. Also, DTEK Energy might have lost its confidence in
its prospects on the new wholesale market, established in July 2019, and might
be using the quarantine as an excuse to possibly default. If so, DTEK’s future
sustainability is under question.

Interestingly, two days after DTEK Energy’s announcement
of default, power prices surged to an average of UAH 1,690/MWh for Mar. 29-Apr.
3 on the day-ahead market, which is about 24% higher than in the first 28 days
of March. According to media reports, this happened because nuclear power
producer Energoatom (the dominant player on the electricity market with low
production costs) hiked its offer prices significantly. Thus far, it’s not
clear whether such a price jump will be sustained. But if so, DTEK Energy’s
financials will radically improve in 2Q20. In the best case, therefore, DTEK
will get a chance to significantly improve its liquidity and financial
performance already this year, so there won’t be any need for concessions from
its creditors.

In any case, the experience of the new electricity market
in Ukraine indicates that the market is too shallow and its prices depend
primarily on the behavior of Energoatom. Such dependence on a state-controlled
power generator is a big operating risk for DTEK.