Moody’s has downgraded the credit rating of Zagreb Holding from ‘Baa3’ to ‘Ba2’ following the recent downgrade of its owner, the City of Zagreb, placing it immediately under review for a potential further downgrade.
At the end of last week, Moody’s downgraded the credit rating of the City of Zagreb from ‘Baa3’ to ‘Ba1’, in conjunction with the downgrade of Croatia’s rating from ‘Baa3’ to ‘Ba1’. The outlook for Croatia’s rating was changed from negative to stable, while the outlook for the City of Zagreb’s rating was changed from stable to negative, due to the pressure on the city’s finances generated by Zagreb Holding.
The city-owned company is increasingly facing liquidity issues, and the situation is further complicated by weak profitability and significant debt, according to a statement released on Monday.
In the past two years, the liquidity of Zagreb Holding has been under significant pressure due to the high share of short-term debt in the total debt and interest on large borrowings related to the implementation of an extensive capital expenditure program, the statement emphasizes.
Another reason for the downgrade is the strong institutional and financial ties with the City of Zagreb, whose continuous support will remain key to preserving the fragile profitability of the city company and its operations.
Moody’s has also placed the new rating of Zagreb Holding under review for further downgrade in anticipation of its business report for 2012 and forecasts for the current and following years. The assessment is expected to last three months, focusing on additional business and liquidity pressures related to changed macroeconomic and financial conditions.
The agency could upgrade the rating of Zagreb Holding if it raises the rating of the City of Zagreb, but only on the condition of significant improvement in financial results and liquidity and sustainable debt reduction.
Conversely, the rating could be further downgraded in the event of a further downgrade of the City of Zagreb’s rating. Possible triggers for a downgrade could also include ‘negative changes in the institutional and financial framework in which Zagreb Holding operates’ as well as further deterioration in business results and liquidity and an increase in debt.
