Moody’s Lowers Iceland’s Credit Rating Skip to content

Moody’s Lowers Iceland’s Credit Rating

International investors’ service Moody’s announced yesterday that it has lowered the credit rating for the Icelandic state by two levels. The credibility of Iceland’s foreign and local currency bonds are now rated with a Baa3, down from Baa1.

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“The Baa3 rating weighs the enduring fiscal, financial and monetary challenges resulting from the crisis against Iceland’s high wealth, economic flexibility and sound institutions,” Moody’s senior analyst Kenneth Orchard said in a statement, according to bloomberg.com.

Baa3 is the lowest investment grade. The outlook on all ceilings and ratings has been changed from stable to negative.

Fitch and Standard & Poor’s rank Iceland’s long-term foreign-currency debt BBB-, with negative outlooks, one level above junk.

“The pace of future recovery will be largely dependent upon new investment in export industries as domestic demand is expected to be weak for several years,” Orchard said.

Moody’s credit rating for Reykjavík Energy (OR) is even lower than that of the Icelandic state. It dropped from Baa1 to Ba1, down to junk, Morgunbladid reports.

Moody’s argued that the continued weak exchange rate of the Icelandic króna has made OR’s debt position worse, considering that most of the company’s debts are held in foreign currencies while its revenue is in ISK.

Furthermore, demand for the company’s energy has decreased because of the economic crisis and OR was already in a difficult financial position before the crisis hit, Moody’s stated.

However, while OR is in a tight spot regarding liquid resources, the company claims that it can fulfill its needs for funding with domestic loans, among other loans.

Moody’s believes that if a new power plant will be constructed by Hverahlíd on Hellisheidi, which is deemed likely, OR can increase its revenue in USD and thus ease the repayment of foreign loans.

Yet OR is in need of support from Reykjavík City and the Icelandic state, Moody’s reasoned, and the company is likely to receive such support, although the authorities don’t have the same capacity as before the crisis to back companies up.

Chairman of OR Gudlaugur G. Sverrisson told Morgunbladid that the company was informed by Moody’s that public companies are always rated one category below the respective state.

“We never had a chance. The only thing we can do is demonstrate flow of capital, our liquid resources position and that we will honor our obligations,” Sverrisson said, adding that OR cannot help the drop in the state’s credit rating, which certainly is a serious matter.

Earlier this month it was revealed that the European Investment Bank (EIB) has agreed to grant OR a more than ISK 30 billion (USD 240 million, EUR 160 million) loan to fund its power plant on Hellisheidi and Sverrisson stated that Moody’s rating won’t affect that loan.

“The message from the EIB when we took the loan was very simple,” Sverrisson said. “The loan is based on their own estimate of OR. They have their own risk evaluation and don’t follow Moody’s or Fitch.”

Click here to read the full story on bloomberg.com.

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