Moody's Ratings downgrades Electric Networks of Armenia to Ba3; outlook negative

Moody's Ratings has 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, Report informs.

Previously, the ratings were on review for downgrade. This rating action concludes the review for downgrade that was initiated on ENA on June 20, 2025.

"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 the company's monopoly position in electricity distribution in Armenia, which makes it a critically important infrastructure company in the country; the regulator's track record of transparent tariff regulation; 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; its sound financial profile, despite significant debt-funded investments and recently commenced dividend payouts, which also remain flexible; and 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 ENA's moderate scale of operations, naturally constrained by the size of the Armenian economy and population; its increased susceptibility to government influence and regulatory risks; lack of history of renewed 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; the company's large investment programme and dependence on external funding amid persistently negative free cash flow; and 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," reads the update.

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.