The need to set up provisions is knocking on the door of the creditors of "Hidroelectrica"

• Remus Borza: Some banks are acting hypocritical in their relationship with "Hidroelectrica"

• Bank sources: Lenders need to set up provisions at the end of he month

• Gelu Gherghescu, "Ernst&Young": Some bankers are afraid things might spiral out of control and they may opt to set up partial provisions for their exposure

The banks which lent money to "Hidroelectrica" will set up provisions at the end of the month, which will pressure their profits, as the local resources are getting increasingly more expensive, and their parent banks are reducing their exposure, because they need to find financing sources for recapitalization.

The creditors of "Hidroelectrica" need to set up provisions "upon first classification", that is, at the end of the month, bank sources said.

Even though the lenders need to set up provisions for the loans extended to the energy maker, audit firms do not consider that the insolvency of "Hidroelectrica" will pose a problem for the banks, because the existing situation is not an "ongoing problem", our sources said.

Banks have an exposure of 378 million Euros on "Hidroelectrica", and some lenders show a certain "hypocrisy" in their relationship with it, as over the last 20 years they have made "a pretty penny" from it, without any incidents, said Remus Borza, the receiver of the energy company said yesterday, according to Mediafax.

He explained: "There is a lot of talk about the banks' exposure to "Hidroelectrica". From my point of view there has been a lot of hypocrisy from these banks. In all of these 20 years the banks made a pretty penny from [their relationship with the company], they had turnover, financing or credit lines, they never had any incident with Hidroelectrica. The exposure of the banks is just 378 million Euros, which is different than the numbers mentioned in the press. The banks aren't running any risk".

Remus Borza also said that the guarantees for the loans are the revenues which "Hidroelectrica" makes from the sale of energy, and they can only increase, which means the value of the banks' collateral will increase.

Contacted by "BURSA", Gelu Gherghescu, a partner at "Ernst&Young", said that the International Financial Reporting Standards (IFRS) require the identification of the exposures/customers which show hints of depreciation, and in such cases there is a need to consider provisions.

"As a rule, an exposure is considered depreciated if it is 90 days overdue, in cases of insolvency or bankruptcy or when there is other information which suggests that the bank will not fully recoup the loan it has granted", he explained.

In the opinion of the representative of "Ernst&Young", some bankers are afraid that the process of the reorganization "Hidroelectrica" may get out of control, but the lenders will get their money.

Gelu Gherghescu said: "In the case of Hidroelectrica, even though we are dealing with a situation of insolvency, based on the publicly available information about this approach, I don't think that this means that the banks will fully recoup their loans.

As a result, each bank will review to what extent they expect to recoup the amounts they lent, using information which may not be public, and to which, as is expected, they have access in their position of creditors and they will decide accordingly. As is to be expected, some people are afraid things will get out of control and they may partially set up provisions to cover this exposure".

According to information circulating in the market, the provisions which the lenders must set up, depend on the value of the collateral. If the collateral is significant compared to the loan, then the bank may only need to set up a small provision or none at all, but if the collateral is small, then the banks will need to set up provisions.

Some of the local lenders which have granted some of the largest loans to "Hidroelectrica" include ING Bank (60 million Euros), Banca Comercială Română (50 million Euros), BRD (30 million Euros) and Banca Transilvania (120 million lei).

With the exception of BCR, which has a letter of comfort from the Ministry of the Economy and a pledge of all the accounts opened with the bank, the loans of ING Bank, Banca Transilvania and BRD are guaranteed using contracts for the provision of electricity. In the case of BRD, the line of financing also has a letter of comfort from the Ministry of the Economy as collateral.

If the bilateral contracts get canceled, then the collaterals of the loans will disappear, and the exposures of the banks will be unsecured.

Citi International PLC is the first bank of the creditors of "Hidroelectrica", which last week, lost one of the collaterals received for the loan of 75 million Euros it granted to the electricity maker. The collateral was represented by the contract which the energy plant had with "Euro-P.E.C.", of Galaţi, which was denounced due to the outstanding debts of 37.8 million lei. The losses incurred by "Hidroelectrica" have amounted to 118.5 million lei.

It isn't just bankers that have expressed their discontent when it comes to the situation of "Hidroelectrica", but investors as well. Steven van Groningen, the president of the Council of Foreign Investors, maintains that the energy maker contributes to higher uncertainties when it comes to investors.

"Moody's" worsens the outlook of Romania's rating and withdraws the ratings of granted to "Hidroelectrica"

According to reactions in the market, the insolvency of the greatest energy maker in Romania, could create a dangerous precedent and furthermore, they could lead to the cut of the country's rating.

In the beginning of last week, financial ratings firm "Moody's" warned that the insolvency of "Hidroelectrica" is negatively influencing the financial state of Romania and implicitly its credit rating.

After just four days, "Moody's" worsened Romania's "Baa3" rating outlook, from stable to negative, due to the risks related to the exposure to the Eurozone, through commercial, investment and financial channels. Another reason was that given the relatively high level of foreign currency debts and the significant yearly outstanding liabilities related to those debts, any worsening of the conditions in the Eurozone could amplify the risks concerning the balance of payments and the banking system.

Also, on the same day, the ratings firm withdrew the corporate rating "Caa1" and that of likelihood of default of "Hidroelectrica", claiming that it had insufficient or inadequate information which prevented it from maintaining those ratings.

The largest energy maker has filed for insolvency on June 20th, at the request of the Board of Directors of the company. The reason behind the request was the drop in turnover and the increase of the company's debts amid a "disastrous management" and the 2011 draught.