Eurohold Bulgaria AD

Regulatory Filings • Jul 1, 2019

NEWS RELEASE

Fіtсh placed Eurohold's rating under observation

Sofia, 1st July 2019 - With reference to the agreement that Eurohold Bulgaria AD signed to acquire CEZ's assets in Bulgaria, Fitch Ratings, the international credit rating agency, placed Eurohold Bulgaria AD's Rating under observation. Eurohold is publishing Fitch Ratings' statement directly:

Fitch Ratings has placed Eurohold Bulgaria AD's (Eurohold) Long-Term Issuer Default Rating (IDR) and Insurance Company Euroins AD's (Euroins Bulgaria), Euroins Romania Asigurare Reasigurare S.A.'s, and Insurance Company EIG Re AD's Insurer Financial Strength (IFS) Ratings on Rating Watch Negative (RWN).

The RWN follows the announcement that Eurohold plans to acquire the Bulgarian assets of the Czech power utility company CEZ a.s. (CEZ assets) for EUR335 million (BGN655 million). The completion of the transaction is subject to approvals from the Bulgarian Competition Authority and the Bulgarian energy regulator.

KEY RATING DRIVERS

The RWN reflects Fitch's view that the proposed acquisition of CEZ assets could give rise to financial risks due to the expected high debt proportion in the financing structure as well as integration and execution risks.

The planned high debt proportion in the financing structure (minimum 75% of the acquisition price) could significantly reduce distributable earnings from CEZ assets especially in the initial period. However, power distribution, the largest and most profitable business in the transaction, is regulated and produces stable cash flows, and therefore the acquisition of CEZ assets should over time contribute to higher stability and predictability of Eurohold's earnings. This could contribute positively to the group's credit profile in the medium- to long-term.

Eurohold lacks previous management experience in power utilities and will therefore rely on current management of CEZ assets to ensure smooth operations. Fitch understands from management that Eurohold aims to retain the existing management team of CEZ assets. Additionally, Eurohold has formed an advisory board of energy experts, which is supporting the company on the acquisition process and will oversee the integration of CEZ assets during and after transaction closing.

However, we expect the integration will also require significant management resources from Eurohold. As a predominantly financial investor, Eurohold is also likely to look for cost-saving opportunities to further improve its return on investment, which could give rise to additional execution risks.

Fitch expects the transaction to be broadly neutral to Eurohold's insurance-related financial leverage ratio and capitalisation, which would exclude both the equity and debt financing relating to the acquisition of CEZ assets. Eurohold's capitalisation based on Fitch's Prism Factor Based Model was 'Weak' and the group's Fitch-calculated financial leverage stood at 65% at end-2018 (2017: 64%).

However, Fitch expects the transaction to increase financial leverage at consolidated Eurohold level due to the highly leveraged nature of the transaction. Fitch also believes Eurohold would provide additional support to the financing structure (with or without a legal obligation) if necessary to protect its investment. Such a scenario could put additional pressure on Eurohold's capitalisation and/or financial leverage.

Eurhold plans to issue EUR80 million (BGN156 million) preferred shares to partly fund the acquisition of CEZ assets. These shares would carry fixed dividends to be covered by Eurohold's net or retained earnings. Fitch expects this to be slightly negative for Eurohold's insurance-related fixed charge coverage ratio, which would have been 1.2x calculated on a pro-forma basis at end-2018 after inclusion of these expenses (end-2018 actual: 1.3x).

Fitch expects interest costs arising from financial debt related to the transaction to be covered by revenues generated by CEZ assets. However, Fitch sees high execution risk associated with the debt servicing capability of CEZ assets.

RATING SENSITIVITIES

Fitch will resolve the RWN on the regulatory approvals of the transaction and after completing its assessment of the standalone credit profile of CEZ assets and the final financing structure.

FULL LIST OF RATING ACTIONS

Insurance Company Euroins AD

--IFS Rating 'BB-' placed on RWN

Euroins Romania Asigurare Reasigurare S.A.

--IFS Rating 'BB-' placed on RWN

Insurance Company EIG Re AD

--IFS Rating 'BB-' placed on RWN

Eurohold Bulgaria AD

--Long-Term IDR 'B' placed on RWN

--Long-term senior debt 'B'/'RR4' rating placed on RWN

Eurohold Bulgaria AD

Sofia-based Eurohold Bulgaria AD is a leading independent business group, operating in the CEE/SEE/CIS region and the largest publicly-listed holding company in Bulgaria. Eurohold's subsidiaries operate in the field of insurance, leasing, car sales, asset management and investment services in 10 European countries. The company is listed on the Bulgarian Stock Exchange and the Warsaw Stock Exchange. The group has over 2.5 million clients and approximately 3000 employees. As of 2018, Eurohold's consolidated revenues amounted to BGN 1.3 billion, its operating profit reached BGN 52.3 million and its consolidated assets totalled BGN 1.4 billion. For the last 20 years the holding company has completed 16 successful acquisitions of companies in different business segments in Central and Eastern Europe in transactions with leading corporations in Europe. Eurohold owns Euroins Insurance Group (EIG), one of the largest independent insurance groups in the CEE/SEE/CIS region, operating in 10 European markets, including own subsidiaries in Bulgaria, Romania, North Macedonia, Ukraine, Georgia and Russia. EIG is also operating in Greece and has niche operations in Spain, Poland and Italy. In March, 2019, EIG agreed to take over 4 insurance companies from Germany-based ERGO in 3 European countries - Romania, the Czech Republic and Belarus.

www.eurohold.bg www.eig.bg