Standard & Poor’s report on the creditworthiness of Enemalta confirms what many had feared – our energy generating company is in a long, deep tunnel that poses serious challenges not just for the recovery of this enterprise but also for the wellbeing of our economy.
Standard and Poor’s showed disappointment on the delay in the restructuring of the corporation’s debt- John Cassar White
A rating agency’s main interest is to analyse the credit worthiness of an entity that borrows money in financial markets. Through ratings, lenders can gauge the risk involved in investing in such entities. Enemalta’s debt is now ranked as B+, an indication of a high risk that this organisation may not be able to meet it repayment commitments as they fall due. The government has indicated that Enemalta’s debt is about €600 million. This figure probably excludes the corporation’s overdrafts that by definition do not have a fixed repayment programme. It is also likely that there are other outstanding loans made directly by the government to Enemalta.
Standard and Poor’s showed disappointment on the delay in the restructuring of the corporation’s debt. They confirmed that this was one of the reasons for their downgrade. The restructuring of this debt will probably involve an agreement with the banks to reschedule the maturity of Enemalta’s borrowing over a 25 year period. A financial engineering plan could involve the transfer of Enemalta’s debt to a special purpose vehicle (SPV) by means of which, through a complex series of transactions involving the government, Enemalta, the banks and the SPV, Enemalta will transfer its title on land that it owns in return for clearing its debt from the balance sheet.
S&P justifies its downgrading of Enemalta to “vulnerable, reflecting the company’s high cost, and mature generation portfolio (based mainly on fuel oil), its exposure to oil prices, poor profitability, and the already high level of tariffs”. When one adds the capital expenditure commitments of the corporation that just for the coming 12 months amounts to €90 million, one can understand the daunting task facing Enemalta.
It is becoming quite common for lenders to live in denial of the real extent of the problems underlying their lending to insolvent borrowers. Banks often roll over their problematic lending to troubled borrowers, hoping that their problems of insolvency will eventually become less acute. This is what, in my opinion, happened in the Greek debt crisis, even if now substantial “haircuts” on outstanding debts are being accepted by investors.
S&P issued a stern warning to Enemalta about the sustainability of its restructuring plan. “We will monitor the terms of any renegotiation or extension of debt to ascertain that creditors do not receive less than the original promise, are adequately compensated, and voluntarily enter into the extension.” This tough comment is possibly the result of S&P doubting how Enemalta, that is so obviously insolvent, can really promise to meet its present repayment obligations, even if they are spread over a longer period of time.
Understandably, S&P does not assess the likely effect of Enemalta’s dysfunctional management on the local consumers that use the corporation’s services. But this is certainly an important issue. It is a worrying fact that Enemalta charges monopolistic high prices for providing electricity to private as well as business customers. This is affecting Malta’s competitiveness and economic prospects at a time when both the local and foreign economic environment is not exactly encouraging. So one needs to ask whether a restructuring plan that is built on a commitment by Enemalta to continue to carry the present mountain of debt built over the last three decades can really protect the corporation’s consumers from further punishment in the form of high electricity tariffs.
If the government assumes direct responsibility for at least a part of Enemalta’s debt to sanitise the corporation’s finances, then our debt problem would become even more serious. This is just one reason why the administration should be more determined in tackling our national debt. Long suffering consumers should no longer be charged energy rates that are heavily loaded with the cost of decades of political ineptitude, inefficient management and ineffective investment.
A proper restructuring plan should not just be about appeasing Enemalta’s lenders, who must be anxious about the prospects of being repaid on time, but must ensure that this public corporation really provides a reliable energy service to families and businesses at rates prevailing in other EU countries where completion in this sector is a reality.
The first step to leave this blackout behind us should be the publication of Enemalta’s 2011 results.
johncassarwhite@yahoo.com