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Concorde Capital Research: Fitch downgrades DTEK Energy rating to C, outlines further downgrade

April 2, 2020
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.
Company — DTEK Energy
  • Full name
    DTEK Energy BV
  • Registration country
  • Industry