Israel Electric Corporation (IEC) is readying to raise $500 million overseas. The debt it raises will be added to an existing total of a staggering NIS 63 billion. This is at a time when the disruption of gas supplies from Egypt to Israel is raising the corporation's power production costs by billions of shekels, and its ability to repay debt on time is no longer to be taken for granted. Who pays the price in the end is something you can guess by yourselves.
Last year, when agricultural exports company Agrexco collapsed, the State of Israel washed its hands of all responsibility for it. In the case of IEC, however, it obviously cannot afford such an attitude.
There is no need to explain the importance of IEC's continued existence and development, hence analysts' view that the state will continue to support it whatever happens.
This is the explanation for the high credit rating that enables IEC to continue raising debt despite its position.
And the debt raising indeed goes on. In 2011, IEC raised some NIS 4 billion on the local capital market, and it needs to raise a far higher sum in 2012 in order to meet its financial needs. However, even if it succeeds in that, its position is liable to deteriorate. At the end of the third quarter of 2011, it had NIS 1.5 billion cash, and it subsequently took a loan of NIS 1 billion from Bank Hapoalim. This year, it has to repay NIS 3.7 billion, so that the cash flow gap is still large.
Following the cessation of gas supplies from Egypt because of sabotage of the pipeline in the Sinai, IEC reported two months ago that "the switch to alternative fuels will have an effect amounting to billions of shekels in 2012, and if there is no supply of gas from Egypt at all, the company estimates total expenditure on fuel consumption in 2012 at NIS 20 billion, compared with NIS 14 billion in 2011."
IEC declared openly that its financial position was difficult. "In recent years, the company's financial strength has been eroded, which manifests itself in low rates of return on capital and low profitability. The company's internal sources enable it to repay its debts, but are insufficient to finance the full extent of investment required to carry out the development plans for the power industry which are needed to meet the developing needs of the economy."
The solution that IEC, headed by president and CEO Eli Glikman, proposes is simple: "To bring about a situation in which the electricity tariff reflects the company's operating and capital costs." In other words, raise the tariff and let the consumers pay more. Much more. During 2011, prices were raised twice, by 15% altogether, and in the coming year, IEC expects a further rise in the region of 30%.
The government is taking steps to assist the company in dealing with the cash flow problem arising from the disruption to gas supplies. Yesterday, for example, the Tax Authority acceded to IEC's request to allow it to reschedule its VAT payments. But deferral and rescheduling of payments are not enough. Within five years, the company's debt has swollen by NIS 49 billion to NIS 63 billion today (of which some NIS 33 billion is bond liabilities).
To this must be added the fact that raising capital is not as easy as it was. The interest rate is rising, and rating agencies have cut the company's rating to Aa3 (Midroog) and AA- (S&P Maalot). Although this is still a fairly high rating, Midroog stated in October that "there has been a significant deterioration in the company’s coverage ratios, as a result of substantial erosion of its cash flow."
Because of the hiccups in raising capital in Israel, IEC submitted a request for a state guarantee as a surety for its capital raising. In addition, as mentioned, it is looking to capital markets overseas.
"We see IEC's connection with the state as the closest it can possibly be, hence its credit rating approaches that of the state, because the state will not let it fall, and will continue to provide support," explains Midroog Ltd. VP Merav Ben Canaan-Heller.
"There is no real possibility of shutting down IEC," she says. "Israel is an island from this point of view, because we cannot buy power from our neighbors or sell to them, and so we have no alternatives."
Ben Canaan-Heller says the connection between the state and the company has two aspects: support, and two-way dependence. "An erosion in the assessment of the support and the dependence is liable to lead to a substantial rating downgrade," she warns. "The rating looks not just at the company as it stands, but takes in the state's support."
What is the likelihood of a debt arrangement?
"Midroog rates IEC Aa3 with a stable outlook, which means that the company's indebtedness is of high quality and involves very low risk. That gives you the answer about the chances of a debt settlement."
Published by Globes [online], Israel business news - www.globes-online.com - on January 26, 2012
© Copyright of Globes Publisher Itonut (1983) Ltd. 2012