Moody`s Ratings Downgrades Electric Networks of Armenia as a Result of Forced Nationalization

ArmInfo. Moody's Ratings (Moody's) has today downgraded Electric Networks of Armenia's (ENA) long-term corporate family rating (CFR) to Ba3 from Ba2 and its probability of default rating (PDR) to Ba3-PD from Ba2-PD. The outlook is negative. Previously, the ratings were on review for downgrade. This rating action concludes the review for downgrade that was initiated on ENA on 20 June 2025, as noted by Moody's Ratings.

Ratings Rationale

Today's downgrade of ENA's ratings reflects the company's heightened susceptibility to government influence and regulatory risks resulting from the adoption of legislative amendments in July 2025 enabling the government to nationalize the company and the regulator to initiate certain administrative proceedings in certain cases.

The adopted legislative amendments enable the regulator to intervene in regulated sectors to enforce continuity of service, in case the energy sector reliability is threatened. In particular, the regulator is authorized to terminate licenses or appoint temporary administrators. Based on these legislative amendments, the regulator appointed a temporary administrator for ENA for a period of three months, with a possibility of extension. Also, the amendments establish the government's preferential right to acquire strategic assets, set compensation limits based on market value, and provide mechanisms for forced alienation of shares if voluntary sale fails.

While we do not necessarily expect any specific credit negative scenario to occur, the recent legislative and regulatory developments indicate ENA's increased exposure to event risks related to the regulatory and business environment. As a result, we no longer view the company's rating to be appropriately positioned higher than the sovereign rating of the Government of Armenia (Ba3 stable).

ENA's Ba3 rating continues to factor in (1) the company's monopoly position in electricity distribution in Armenia, which makes it a critically important infrastructure company in the country; (2) the regulator's track record of transparent tariff regulation; (3) ENA's historically good visibility into profitability and cash flow generation under the clear-cut arrangements for the recovery of costs and pre-agreed investments, which have limited its exposure to the domestic economy and foreign-exchange risk; (4) its sound financial profile, despite significant debt-funded investments and recently commenced dividend payouts, which also remain flexible; and (5) its access to long-term funding in the domestic capital market, which will continue to support its liquidity, and its established relationships with international financial institutions.

The rating also takes into account (1) ENA's moderate scale of operations, naturally constrained by the size of the Armenian economy and population; (2) its increased susceptibility to government influence and regulatory risks; (3) lack of history of tariff arrangements, as the company still operates under the first tariff period which will expire in 2027, although key principles of the regulatory regime are set in law for an indefinite period; (4) the company's large investment program and dependence on external funding amid persistently negative free cash flow; and (5) the uncertainty around its ownership structure.

Because of the uncertainty over the impact of recent developments on ENA's governance, we changed the company's credit impact score to CIS-3 from CIS-2 to reflect that while governance considerations have a limited impact on the current credit rating, they have potential for greater negative impact over time.

OUTLOOK The negative outlook reflects the continuing uncertainty over the evolution of the regulatory and business environment, including potential nationalization, and the impact of recent developments on ENA's governance, operations, investment program, financial policies, credit metrics, liquidity and access to international funding.

Factors that could lead to an upgrade or downgrade of the ratings

ENA's ratings are unlikely to be upgraded over the next 12-18 months given the negative outlook. We could consider changing the outlook to stable if the legislative, regulatory and event risks decrease for the company. Over time, upward rating pressure would be conditional upon an upgrade of Armenia's sovereign rating and a decrease in geopolitical risks, provided the regulatory and business environment is supportive and the company preserves its strong financial profile, with funds from operations (FFO)/interest expense above 4.0x and retained cash flow (RCF)/debt above 15% on a sustainable basis. For an upgrade, we would also expect ENA to maintain sound liquidity with a balanced debt maturity profile, continued access to international capital markets and prudent management of refinancing needs in a timely manner.

ENA's ratings could be downgraded if (1) Armenia's sovereign rating is downgraded; (2) there is a significant deterioration in the regulatory and business environment, or it appears likely that ENA's ownership structure would weigh on the company's credit quality; (3) the company shifts to a more aggressive financial policy such that its FFO/interest expense declines below 3.0x and RCF/debt declines below 8%, both on a sustained basis; or (4) ENA's liquidity weakens significantly or there is a risk of covenant breaches.