Bord Gais and the credit rating conundrum

Bord Gáis, the company which has a monopoly over the supply of natural gas in the Republic, has joined the ranks of grown-up companies and got itself a credit rating.

The chief executive of the company, Mr Gerry Walsh, has described himself as "delighted" with the ratings given to the company by Standard & Poor's and Moody's, the two most important international credit rating agencies.

The ratings were a prerequisite for Bord Gáis to go out and borrow some €500 million on the world's capital markets to part-fund two large infrastructure projects.

A credit rating is in essence a measure of the risk of a company or other entity defaulting on its debts. The highest rating is AAA and Bord Gáis got Baa1 from Moody's and A-minus from Standard & Poor's.

The Moody's rating means a Bord Gáis bond is "neither highly protected or poorly secured". While S&P takes account of the fact that the company is "somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions".

Hold on.

Is this the same Bord Gáis that is owned by the Government and doesn't that Government have the highest possible credit rating from S&P of AAA?

Doesn't it also have an AAA ratings from Moody's and Fitch-IPCA, the other two international credit rating agencies?

Why then, if Bord Gáis is owned by the Government - which presumably will pick up the tab if it cannot pay its debts - does it not enjoy the same credit rating as the Government?

Part of the answer to this question is contained in the press releases issued by Moody's and S&P last week. Moody's said it "takes little account of government ownership in the current ratings".

It also notes that "increasingly the role of the private sector in the energy industry remains government policy and may lead to the full or partial privatisation of Bord Gáis Éireann over the medium term".

S&P on the other hand argues: "The high likelihood that Bord Gáis will remain government-owned in the short term provides support for the company as it undertakes its capital works program."

Implicit in this assertion is that S&P is far from convinced that Bord Gáis will remain in State hands in the medium to long term.

So where did Moody's and S&P get the impression that the "for sale" sign is about to go up over Bord Gáis?

The answer is probably the company itself and quite likely the Government - more specifically the new Department of Communications, Marine and Natural Resources. You can be sure that the rating agencies relied heavily on briefings from the company, its advisers and probably the Department in forming their views.

It would appear then that the Government's real position on the privatisation of State assets is much more concrete than the rather ambivalent statement in the current programme for Government that "we will seek to secure a viable long-term future for State companies without ideological preconceptions".

Clearly, international credit rating agencies are being given insights into the Government's thinking to which the tax-payer is not privy. The reality would appear to be that Bord Gáis - along with the ESB, Bord na Móna etcetera - is busily getting ready to go to the market with the tacit approval of the Government.

Meanwhile, a fiction is maintained that nothing of the sort is going on. The reasons for this rather clumsy subterfuge are all too apparent.

No sooner was the cat out of the bag last week than Bord na Móna was seeking a Government mandate for privatisation that the various vested interests were out of the traps. SIPTU quickly signalled its opposition to any such move, as it has at other State companies that really belong in the public sector at this stage.

SIPTU and the other opponents of the privatisation of State companies would do well to ponder the import of the Bord Gáis credit rating.

The market - in the form of S&P and Moody's - has already realised that these companies will have to operate on a fully commercial basis for various reasons and the State's ability to support them is being eroded. As a consequence privatisation is a probability rather than a possibility.

The reasons for this include the obligation on the Government to open up energy markets to competition in order to comply with EU policy. There is also the whole issue of state support to industry, which makes it difficult for governments to guarantee borrowings and make up losses.

In Ireland's case there is an additional problem. The massive investment required under the National Development Plan means the Government is keen to keep as much borrowing off its balance sheet as possible.

This included getting State companies such as Bord Gáis to take on debt which is not specifically guaranteed by the State and hence may not count towards to the national debt.

The other thing that opponents of privatisation should take on board is that the likes of S&P have started to accord them credit ratings that recognise this reality. These ratings in turn feed into the sort of interest rates that the company must pay and a whole host of other factors linked to financial performance.

The reality is that these companies will all be privatised and that the rearguard action being fought by the trade unions is already doing damage. Bord Gáis is now paying the price associated with not being a State-owned company - a lower credit rating - while at the same time not enjoying the benefits of being a public company.