Credit Crunch Risks Blackouts as Projects on Hold: Poland Credit

Poland’s push to avoid electricity blackouts by developing more than $5 billion of new power plants is at risk as the companies chosen to build them struggle to secure financing after a record bankruptcy.

The cost for builders to sell debt has doubled in the last year to at least 800 basis points above the Warsaw interbank offered rate, according to money manager KBC TFI SA in Warsaw. That corresponded to a yield of 10.7 percent yesterday, compared with 2.67 percent on 2018 Eurobonds issued by Ferrovial SA, the Spanish owner of Poland’s biggest builder Budimex SA, according to data compiled by Bloomberg.

Poland may face power shortages as early as 2016 as utilities must replace aging, inefficient plants to meet European Union emissions laws, the Economy Ministry said July 30. PGE SA and Tauron Polska Energia SA, the nation’s two biggest utilities, have delayed investments, citing financing difficulties for builders after the 2012 bankruptcy of PBG SA, then the country’s third-largest construction company.

“Practically no financial institution wants to fund builders because of the very high risks,” Pawel Borys, head of strategy at PKO Bank Polski SA, the country’s largest lender, said Aug. 23 in Warsaw. “The industry is decimated after road investment” projects turned unprofitable, he said.

Shrinking Share

PKO’s lending to builders made up 11.4 percent of its corporate loan portfolio in June, down from 12.2 percent a year earlier, according to its website. Construction-industry loans by Bank Pekao SA, Poland’s second-biggest lender, fell to 7.2 percent of its portfolio in 2012 from 8.4 percent in 2011.

PBG’s 825 million-zloty ($250 million) default, sparked by losses on highway contracts, preceeded December’s bailout of Polimex-Mostostal SA, the nation’s second-biggest builder. Polimex failed to pay interest on debt again in June. Creditors agreed not to block its access to funding until Sept. 30.

The company said three days ago that it’s close to agreeing a “financial package” that would boost liquidity.

The industry’s “troubles” mean that, as well as facing an 800 basis-point spread to sell debt, construction company bonds must be secured and are more likely to attract funds that accept higher risk, KBC’s Dariusz Kusmider, who helps oversee the equivalent of $1.47 billion, said yesterday by phone.

Bank Guarantees

PGE this month gave Polimex, Mostostal Warszawa SA and Rafako SA, a unit of PBG, an additional 120 days to get bank guarantees needed to start building an 11.6 billion-zloty power plant in Opole. The builders said Aug. 14 that they’re in talks with PKO over financing.

Tauron extended until the end of September a deadline for Rafako and Mostostal to secure guarantees for its 5.4 billion-zloty Jaworzno project.

Opole and Jaworzno account for about a half of power plants that Polish utilities plan to add in 2018 and 2019, according to the Economy Ministry’s July report. Without them, the power shortages that Poland may experience in 2016 and 2017 will worsen in the following years.

Some builders are getting assistance from abroad. Rafako’s Chinese partner is helping it obtain guarantees from an EU-based bank, Jacek Balcer, a spokesman for Rafako, said two days ago, calling it “practically impossible” to get them in Poland. Companies invited France’s Alstom SA, the world’s third-largest power-equipment maker, to work with them at Opole.

‘Welcome’ Help

“The situation of builders is a significant risk,” Wojciech Ostrowski, the chief financial officer of PGE, said Aug. 28 in Warsaw. “We try to find somebody to support them. All help is welcome.”

The zloty strengthened 0.2 percent to 4.2739 per euro as of 9:22 a.m. today in Warsaw, trimming its 2013 drop to 4.5 percent. The extra yield to hold Polish dollar bonds rather than Treasuries fell three basis points to 165, JPMorgan Chase & Co. indexes show. The spread between Polish 10-year government bonds in zloty and their German equivalents in euros widened one basis point to 264.

The times when construction companies could “easily” sell bonds under “reasonable” conditions are gone, according to Krzysztof Koziol, a spokesman for Budimex.

“The cost of a short-term loan is much higher today than it was in 2012,” he said Aug. 28 by e-mail. “Thanks to our market position we have access to funding but it’s a lot harder to get it, especially if the financing is unsecured.”

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