OCCURRING JUST A FEW WEEKS BEFORE THE LAUNCH OF THE SECONDARY PUBLIC OFFER The downgrade of Transgaz looks quite "convenient"

Yesterday's decision by "Standard&Poor's" to cut the rating of natural gas transporter "Transgaz" (TGN) comes just a few weeks before the government is set to launch the secondary public offer (SPO) for the sale of 15% of TGN on the Bucharest Stock Exchange (BVB).

Considering this announcement, it is very unlikely that the investors would flock to buy TGN stock. Will we see a repeat of the offer of "Petrom", even though "Transgaz" holds the monopoly of the gas transport and is a solid and profitable company? Or is someone interested in pressuring the government to sell the company as cheaply as possible?

Standard&Poor's (S&P) yesterday cut the rating of "Transgaz" (symbol: TGN) to "BB", from "BB+", for the loans denominated in lei, as well as for those denominated in foreign currencies, reaffirming the negative outlook. The ratings firm has justified its decision by stating that the system for the regulation of the transport of natural gas in Romania could affect the company's competitive position. Because of that, S&P has revised its assessment of the risk profile of "Transgaz" from "acceptable" to "weak".

The government has made a commitment to the IMF to launch the SPO for 15% of "Transgaz", this being one of the four measures in the absence of which, the Board of the IMF would not review the agreement it has with Romania.

• Marius Mureşan, BT Asset Management": "The action of S&P is a further argument in favor of a lower price for the offer"

The deviation from the set rules (in this case, from the regulation mechanism) represents a source of risk for investors and they are thus willing to invest only at a higher expected return, (lower price), said Marius Mureşan, Investment Analyst at "BT Asset Management".

"Under the current circumstances, investors are asking for a higher risk premium for risky investments (stocks) than usual, therefore the increase in the risk profile of a company which will go through a public sale offer is not beneficial", the analyst said.

The action of S&P is a further argument in favor of a lower price for the offer, Marius Mureşan also said.

• Nicu Grigoraş, "Intercapital Invest": "The downgrade of < Transgaz > will make the sale of the state's stakes more difficult"

The cut of the rating of "Transgaz" will make it more difficult for the state to sell its stakes through secondary public offers, considers Nicu Grigoraş, broker at "Intercapital Invest". The mission of the intermediaries of these offers thus becomes more difficult, if we also consider the market conditions, with optimism being rather low at the moment, the broker said.

• Simion Tihon, "Prime Transaction": "The decision of S&P will not affect the public offer"

The downgrade of "Transgaz" by S&P could cause a reassessment by institutional investors which were waiting this public offer, considers Simion Tihon, broker at "Prime Transaction". "Even under these circumstances, I think that the institutional investors, and they did not consider the uncertainty of regulations in the energy sector, as such, I think that decision of S&P will not affect the public offer".

• Ionel Blănculescu: "Considering how small the price we would get from the SPO is, any downgrades no longer matter"

The price which the Romanian state could get by selling 15% of the shares of "Transgaz" in the coming period would be very low, which makes selling it unadvisable, economic analyst Ionel Blănculescu. Under these circumstances, the downgrade of TGN by S&P would cause an insignificant decrease of the proceeds from the sale. "The price would be ridiculous, and anything below ridiculous no longer matters", he said.

Ionel Blănculescu considers that the government should, for the moment, halt any primary or secondary listing, and wait for the economy to resume growth, which would lead to a major rise of the price of these stocks. "We are in a buyer's market, and if we sell now, we will do so at lower prices than the ones we could get in a few years", he said.

The analyst recommends the implementation of a strategy similar to the one used by Poland, the Czech Republic and Hungary, where state owned companies buy back their own stock, to allow the governments to consolidate their stakes.

Standard&Poor's blames the downgrade of "Transgaz" on the delays for setting the new rates for the transport of natural gas. The press release of S&P notes: "We have learned that the energy regulator agency, ANRE, did not complete the revision of the existing mechanism for setting tariffs by July 2012, which marks the beginning of the third five years regulation period. In our previous best scenario, we have assumed that there will be visibility both in recouping the previously lost revenue, caused by the lower volumes of gas transported in the recent years, as well as on the new methodology for setting rates before the beginning of the period in question. On the other hand, we understand that the ANRE has announced its regulated revenues for the July 2012 - June 2013 period, but not the new tariff, nor the amount of the revenues to recoup or the schedule to do so". Hence, "Transgaz" has been using the same tariffs since 2009, S&P says, which also considers that the outlook for recouping the tariffs remain very uncertain. This does not match the previous assessment of the ratings firms, which said that the regulators in Romania show a certain support for natural gas transporters. "Furthermore, it emphasizes key risks in the regulatory areas in a jurisdiction where, in our opinion, the decisions concerning regulation are not independent of the government's will", the report also says.

S&P expects the debt of "Transgaz", which amounted to 146.5 million lei (32 million Euros) at the end of 2011, to fall this year and the next. This will happen even though the ratings firm estimates that TGN will see discretionary negative cashflows and will use its cash holdings to cover any potential drop in cashflows, as well as to amortize expenses. Nevertheless, S&P sees the company returning to its normal investment levels by 2014 at the latest, which, together with the payout of higher dividends to shareholders, is likely to lead to a gradual deterioration of its long term financial situation.

The ratings firm did not take into consideration the financial impact which the participation of "Transgaz" in the Nabucco project could have, due to the uncertainties it sees concerning the natural gas sources and to the financing of the project. This participation represents further material risk, but momentarily isolated, for the financial profile of TGN, according to S&P.

The rating of "Transgaz" may drop further, if S&P considers that the new regulatory framework could significantly affect the generation of cashflows.

The ratings firm may raise the rating of TGN if it becomes convinced that the regulatory changes could offer sufficient visibility, predictability and support for the company's revenue. This could mean that this framework would be sufficiently shielded from political intervention with negative effects, generated by the changes of the macroeconomic and fiscal national environment, S&P says.

However, the probability of a rating hike is low at the moment, because it depends on Romania's rating being raised by at least two notches, the agency's report also says.

S&P cut the outlook for the "BB+" rating of "Transgaz" from "stable" to "negative" in July, anticipating that it may cut the company's rating in the near future, due to the uncertainties and pressure from the Government when it comes to the dividend policy. "The rating decision reflects the likelihood of a downgrade of the company in the near future, because we are seeing increasingly high pressure on the business risk profile of Transgaz", the ratings firm was saying at the time.

S&P also downgraded "Transgaz" in the beginning of December last year, from "BBB-" to "BB+", for loans denominated in lei. The decision to revise the rating of the local currency was caused by "Standard&Poor's" downgrade of the Romanian sovereign rating of from "BBB-/A-" to "BB+/B.