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Amorim Energia B.V. - Rating Report

RATING RATIONALE

- We upgrade Amorim Energia B.V. (Amorim) corporate credit rating to BB from BB-.

- Amorim owns a 33.34% economic and voting stake in Galp Energia, SGPS, S.A. (Galp), the listed Portu-guese integrated oil & gas company with upstream and downstream activities. On 7 September 2017 we up-graded Galp’s corporate credit rating to BBB- from BB+. Our rating is supported by Galp’s scale of oper-ation and cash generating businesses in Portugal, our expectation of breakeven cashflow in FY18 de-spite the significant dividend paid by Galp, and low net leverage of around 1x. Nevertheless, our rating is constrained by Galp’s large upstream asset concentration in Brazil and oil price volatility.

- Our rating of Amorim is underpinned by Amorim’s conservative financial policy and the support of its solid key shareholder, Américo Amorim. Amorim sold a 5% stake in Galp in September 2016 for net cash proceeds of €486m, resulting in a holding reduced to 33.34%. The proceeds were used to repay bank debts and negotiate more attractive financing terms. While we view positively Amorim’s conservative financial policy, the company remains fully dependent on the ability of Galp to make dividend payments, its only source of income.

- Amorim’s 19% LTV indicates a sizable equity cushion. Indeed, it has improved slightly compared to last year’s 24% LTV pro forma of the 5% stake sale. Galp’s share price would have to decrease by 81% before Amorim’s LTV increases to 100%, which indicates a comfortable position. In addition, thanks to last year debt repayment, we estimate that the dividend from Galp covers around four times Amorim’s expenses and cash interest payments. It gives comfort if Galp was in the position to have to reduce its dividend in order to improve its free cash flow.