Nordic Credit Rating (NCR) said today that it had placed its 'BBB+' long-term issuer rating on Norway-based regulated electricity distribution system owner and operator Fredrikstad Energi AS on watch negative. The watch negative mainly reflects uncertainty about the company's future standalone credit profile and potential new role as a group-owned entity in Norwegian integrated utility company Å Energi, which is poised to acquire a majority stake in Fredrikstad Energi. At the same time, we lowered our short-term issuer rating to 'N3' from 'N2' following a change in the company's liquidity profile due to fewer committed sources of liquidity than previously compared with expected cash outflows. The 'BBB+' senior unsecured issue rating was also placed on watch negative.
Rating rationale
The watch placement follows the announcement on 1 Nov. 2024 that Fredrikstad Energi's majority owner Fredrikstad municipality has signed an agreement to sell its 51% stake in the company and the latter's hybrid bond to Å Energi for a purchase price of NOK 1.1bn. The negative watch consequently also incorporates our uncertainty about the transaction's impact on the financial risk profiles of both Fredrikstad Energi and Å Energi. We understand the sale is set to close in December 2024 and hinges on approval from the municipal council and anti-competition authorities. If the deal goes through, Fredrikstad Energi will become a majority-owned subsidiary of Å Energi, and we will classify it as a group-related entity and no longer as a government-related entity.
We do not currently have information about how Fredrikstad Energi will be integrated into the Å Energi group or what potential changes might be made to its funding structure. We note, however, that a change in ownership gives Fredrikstad Energi debtholders the right to demand repayment. Specifically, we believe that noteholders of the NOK 200m fixed-rate bond maturing in 2027 have an incentive to exercise the put option included in the bond documentation to reinvest in higher-yielding bonds. In our view, other debtholders are unlikely to demand repayment, and we believe that Fredrikstad Energi has discussed potential repayments beforehand with its lender banks.
We consider that rating downside is limited to one notch, assuming Å Energi does not make material changes to Fredrikstad Energi's standalone credit profile. If the deal finalises, we do not rule out affirming the rating if we believe that Fredrikstad Energi's standalone credit profile remains unchanged and that it would benefit from group support in case of financial distress.
Watch negative
The watch placement reflects uncertainty about Fredrikstad Energi's future standalone credit profile and its integration into and role in the Å Energi group, as well as the announced transaction's potential impact on the overall credit risk profile of the combined group. We expect to gain increased clarity about these topics and to resolve the watch after the announced transaction is finalised.
We could lower the rating if we believe that Fredrikstad Energi is less likely to receive support from Å Energi than from its previous government owner. We could also lower the rating if the new majority owner makes any negative changes to Fredrikstad Energi's standalone credit profile or if we consider that the transaction worsens the credit quality of the combined entity.
We could affirm the rating and assign a stable outlook if we consider that the transaction will not have negative implications for the credit quality of the consolidated group and that the likelihood of extraordinary and timely support to Fredrikstad Energi remains unchanged under the new majority owner.
| Rating list | To | From |
|---|---|---|
| Long-term issuer credit rating: | BBB+ | BBB+ |
| Outlook: | Stable | |
| Watch: | Watch Negative | |
| Short-term issuer credit rating: | N3 | N2 |
| Senior unsecured issue rating: | BBB+ | BBB+ |
Related rating actions
i) Fredrikstad Energi AS assigned 'BBB+' long-term issuer rating; Outlook stable, 10 Nov. 2023.
Related publications
i) NCR Comments: Main owner initiates sale of 51% stake in Fredrikstad Energi, 13 May 2024.
ii) Unregulated Nordic power producers well positioned to capitalise on higher prices, 2 Oct. 2023.
Contacts:
Gustav Nilsson, analyst, +46735420446, gustav.nilsson@nordiccreditrating.com
Geir Kristiansen, analyst, +4790784593, geir.kristiansen@nordiccreditrating.com
Elisabeth Adebäck, analyst, +46700442775, elisabeth.adeback@nordiccreditrating.com
The methodology documents used for this rating are NCR's Corporate Rating Methodology published on 8 May 2023, NCR's Rating Principles published on 14 Feb. 2024 and NCR's Group and Government Support Rating Methodology published on 14 Feb. 2024. For the full regulatory disclaimer please see the rating report.