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ENERGY SECTOR: Neste Leverage Far Above Moody’s Downgrade Threshold

ENERGY SECTOR
BulletCredit Bullets

NESVFH                           A3                          Curve is 5-8bps wider

  • Today’s results were the latest in a long line of negative updates for the name.
  • A downgrade for Neste seems all but assured and seems expected by management – they rarely comment on credit ratings but assured commitment to IG at several points today.
  • Moody’s saw Debt/EBITDA of 1.9x at H1 and forecasted a ratio of 2.6x by FY24. We calc the ratio at 3.8x (accounting for unusual items) as of today’s results against a downside threshold of 2.5x.
  • Bonds trade well wide of Baa1 levels regardless; wide of the BBB- Corps curve and broadly in line with a BBB- Energy curve (not a perfect comp but there isn’t much to work off).
  • Cost cuts and lower dividends are welcome though the choice to still declare any dividend in the face of such a drastic step-up in leverage was questioned on the earnings call:
  • “So you decided to pay a dividend even though your net debt EBITDA was over 4 times. So are you anticipating improving markets this year or what is the reason behind paying a dividend in this situation?”

 

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NESVFH                           A3                          Curve is 5-8bps wider

  • Today’s results were the latest in a long line of negative updates for the name.
  • A downgrade for Neste seems all but assured and seems expected by management – they rarely comment on credit ratings but assured commitment to IG at several points today.
  • Moody’s saw Debt/EBITDA of 1.9x at H1 and forecasted a ratio of 2.6x by FY24. We calc the ratio at 3.8x (accounting for unusual items) as of today’s results against a downside threshold of 2.5x.
  • Bonds trade well wide of Baa1 levels regardless; wide of the BBB- Corps curve and broadly in line with a BBB- Energy curve (not a perfect comp but there isn’t much to work off).
  • Cost cuts and lower dividends are welcome though the choice to still declare any dividend in the face of such a drastic step-up in leverage was questioned on the earnings call:
  • “So you decided to pay a dividend even though your net debt EBITDA was over 4 times. So are you anticipating improving markets this year or what is the reason behind paying a dividend in this situation?”

 

image