Rating On Vector Ltd. Lowered To #BBB# On Revised Corporate Criteria, Off Outlook Stable

Stocks and Financial Services Press Releases Thursday December 19, 2013 11:23
MELBOURNE--19 Dec--Standard & Poor's

MELBOURNE (Standard & Poor's) Dec. 19, 2013--Standard & Poor's Ratings Services said today it has lowered its long-term corporate credit rating on New Zealand-based Vector Ltd. to 'BBB' from 'BBB+', and the rating on Vector's subordinated bonds to 'BB+' from 'BBB-'. At the same time, we removed the ratings from CreditWatch, where they were placed with negative implications on Nov. 26, 2013. The rating outlook is stable.

While Vector's business risk profile is seen as "excellent", the lower rating is based on a reassessment of Vector's financial risk profile as "aggressive" under our revised criteria. Vector's financial risk is assessed against our financial benchmarks for medial volatility of cash flows, as we continue to believe the regulatory framework for regulated utilities in New Zealand is still evolving, less predictable, and yet to establish a track record relative to regimes in Australia or the U.K. Therefore, the threshold metrics for a given rating are marginally higher than if we were to view the regulatory framework more favourably.

"The stable outlook reflects the underlying stability of cash flows from Vector's dominant, stable, and franchise-regulated utility businesses over the medium term," said credit analyst Parvathy Iyer. "The outlook also incorporates our view that earnings contribution of the unregulated businesses will remain at about 20%-22% over the medium term. Further, at the forecast financial profile, Vector would have adequate headroom for withstanding moderate variation to its unregulated earnings." With the tariff path set to fiscal 2015, and minimal upside from the recent merits-review outcome, material improvement to financials is considered limited. Still, for a one-notch higher rating, all else being equal, we would need to see FFO to total debt being sustained at least above 15% and FFO to interest cover of well over 3x. Further, any positive reassessment of the regulatory advantage score over the medium-to-long term could also lead to a higher rating.

"Vector's rating could come under pressure if FFO to total debt and FFO interest cover were to fall below 9% and 2.2x, respectively, on a sustained basis," said Ms. Iyer. "While we believe such a scenario is less likely, it could occur if there was a significant stress on the wholesale gas business and and/or if the regulatory parameters beyond 2015 were adverse and places stress on revenue, EBITDA, and overall financial metrics."

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