Threatened With Credit-rating Cut, Electric Corp. Wins State Aid

Spike in costs is the result of Israel losing its gas supply from Egypt, forcing IEC to buy costlier fuels to run its plants.

After a rating agency threatened a drastic downgrade of the Israel Electric Corporation last week, the treasury has been scurrying to shore up the debt-laden company.

On Thursday, the Finance Ministry approved NIS 3 billion in emergency aid for the cash-strapped government company. IEC has NIS 64 billion in debt - equal to about a fifth of Israel's annual budget.

S&P Maalot, the Israeli branch of international ratings company Standard & Poor's, had warned of a severe three-notch downgrade of IEC's bonds, from AA-minus to A-minus, if the company's financial situation didn't improve. And the government didn't immediately authorize a cash injection to shore up its balance sheet.

Not only would a downgrade impact the cost of Israel Electric Corporation's servicing its massive debt, as well as the cost of raising fresh capital, but it would also impact the institutional lenders holding the company's bonds. With its decision to come through with the NIS 3 billion, the treasury has evidently abandoned its strategy of making aid contingent on IEC's taking efficiency measures, which had included generous benefits for employees, including free electric power even to retirees.

Additionally, Finance Minister Yuval Steinitz agreed to increase government guarantees for the company from NIS 1.5 billion to NIS 2 billion.

S&P Maalot issued for the first time a Negative outlook for IEC in April, meaning that its credit rating was likely to be cut sometime in the future. The agency warned at the time that to avert that cut, the company's cash flow would need to improve. In July, before IEC was slated to raise NIS 2.9 billion in fresh debt with government guarantees, S&P Maalot announced it was extending its Negative outlook until the fundraising was completed. IEC raised the cash, but S&P Maalot did not budge from its Negative outlook.

In fact, the Negative outlook for the IEC's debt-rating has been in place for four months, though such forecasts typically give companies a three-month window to shape up.

At the other Israeli ratings agency, Midroog, which tags IEC debt at Aa3, the company received a Negative outlook in May, and it hasn't been updated since.

At last Thursday's announcement, the IEC and the Finance Ministry outlined the planned state support for the company, which has fallen into serious financial distress due to the shortage of natural gas and the need to purchase expensive alternative fuels to run its power plants.

The spike in costs is the result of Israel losing its gas supply from Egypt, forcing IEC to buy costlier fuels to run its plants. IEC expects that its fuel costs for 2012 will reach NIS 25 billion, nearly double the NIS 12.8 billion it spent last year.