Fitch Expects to Rate AES El Salvador Trust II's Issuance 'BB(EXP)'; Outlook
CHICAGO -- March 14, 2013
Fitch Ratings expects to rate AES El Salvador Trust II's USD310 million debt
issuance 'BB(EXP)'. Fitch has also assigned foreign and local currency Issuer
Default Ratings (IDRs) of 'BB' to AES El Salvador Trust II. The Rating Outlook
is Stable. The company expects to use the proceeds from the issuance to
refinance all AES El Salvador Trust outstanding debt.
AES El Salvador Trust II (AES El Salvador) is a special-purpose vehicle (SPV)
located in Panama that was created to issue USD310 million of notes on behalf
of AES El Salvador Group. AES El Salvador's ratings are based on the combined
credit quality of AES Corp.'s operating assets in El Salvador: Compania de
Alumbrado Electrico de San Salvador (CAESS), Empresa Electrica de Oriente
(EEO), AES CLESA y Cia (CLESA), and Distribuidora Electrica de Usulutan
(DEUSEM). These operating companies will guarantee, on a joint and several
basis, AES El Salvador's proposed debt issuance.
KEY RATING DRIVERS
AES El Salvador's ratings are based on the combined credit strength of the
operating assets that guarantee its debt and reflect the group's relatively
large size compared to the market, low business risk profile, and its
predictable cash flow generation. The ratings also reflect the distribution
companies' high exposure to government intervention risk, and the continued
sovereign risk exposure through subsidies and regulation. The ratings also
take into account the weakening macroeconomic conditions in El Salvador. The
notes benefit from six-month debt-service reserve account in the form of cash
funded from the guarantors or alternatively by a letter of credit provided by
a financial institution.
LARGE MARKET POSITION AND LOW BUSINESS RISK
AES El Salvador's low business risk results from its stable customer base and
a predictable cash flow. Although distribution service territories are not
exclusive and distributors are free to compete for customers, the risk of new
competition is low given that distribution companies possess significant
economies of scale that make it inefficient for more than one company to
operate in any particular geographic area. The company's operations are
considered efficient compared with other distribution companies in the region.
Although energy loses increased during 2012, to 9.36% from 8.71% in 2011 due
to higher energy prices, the company is still considered efficient and losses
The ratings factor in the key player position of AES El Salvador in the
country as the largest electric distributor utility group in El Salvador. The
company's market share position is high, serving 80% of El Salvador's
electricity distribution area, and supplying 67% of the total energy demand in
the country during 2012. The company serves approximately 1.2 million
customers with 976 employees; in 2012 it sold 3.497 gigawatt hours (GWh)
The long-term power purchase agreements (PPAs) with generation companies
contracts were established in a variable cost production based regulation
since August 2011. The distribution companies in El Salvador are now required
to contract at least 70% of expected demand by year end 2017.
AES El Salvador has contracts for approximately 66% of its maximum average
demand. This contractual requirement increases distribution companies
contractual risks as customers are currently free to transfer between
electricity suppliers, still paying wheeling fees to the incumbent
HIGH EXPOSURE TO GOVERNMENT INTERVENTION
The ratings incorporate AES El Salvador's high exposure to regulatory risk,
and receipt of government subsidies. The weakening macroeconomic conditions in
El Salvador could affect large subsidies due to pressures on country fiscal
accounts. Nevertheless, energy subsidies for residential customers are
considered a priority for the government.
The Salvadorian government subsidizes consumers with a monthly consumption of
99KWh or less. Additionally, the government implemented an extraordinary
subsidy for users with consumption below 200 kilowatts (KWh). The permanence
or modifications of this extraordinary subsidy is reviewed quarterly by the
government. The country's users connected to the distribution system with
energy consumption of 99KWh or less represent 66.6% of total users, which
accentuate the importance of the government subsidies in the country. The
state owned utility company, Comision Ejecutiva Hidroelectrica del Rio Lempa -
(CEL) has been providing the funding for these subsidies.
Subsidies are relevant to AES El Salvador as 63% of its total customers as of
December 2012 have a monthly energy consumption of 99KWh or less. Total
subsidies (consumption 99KWh or less, and extraordinary subsidy for
consumption between 99KWh and 200KWh) for 2012 amounted USD135.2 million for
the company (2011:106.7 million). The government has transferred subsidies to
distribution companies in a timely manner. Any future payment delay that will
impact AES El Salvador's leverage due to working capital financial needs,
could pressure the ratings.
TARIFF RESET SUPPORTS CREDIT FUNDAMENTALS
The company's credit profile is supported by its stable and predictable cash
flow generation and strengthening credit metrics as result of higher EBITDA
levels as outcome of the tariff reset for the 2013-2017 period. The tariff
reset was determined as per the new methodology that considers real costs of
the companies based on El Salvador distribution grid instead of an optimized
company model as it was considered in the past methodology.
The recently implemented tariff reset is expected to increase the company's
cash flow generation over the next four years, starting in 2013, by
approximately 23% from previous years. EBITDA is expected to increase to
approximately USD85 million by the end of 2013, and to average between
USD90-95 million going forward.
Total debt as of December 2012 amounted to USD297.3 million, maturing in 2016,
and USD13 million of short-term banking debt. Fitch expects AES El Salvador
leverage ratio to strengthen and to range between 3.5x and 4-0x as result of
the new tariff regime. AES El Salvador's interest coverage will improve to
4.0x on average, from 2.5x-3.0x in the 2008-2012 period due to the higher
AES El Salvador's liquidity is supported by its cash on hand, which as of
year-end 2012 was approximately USD20.6 million, and a USD43.5 million
short-term bank credit facility to buy electricity from generators.
Historically, AES El Salvador has been able to access bank and debt capital
markets. The long term debt maturity is expected to be extended to 2023 as per
the issuance by AES El Salvador Trust II. Liquidity could be affected in case
of higher energy prices for final users that could lead to higher ageing
account receivables. Should distribution companies be forced to issue
additional debt to fund their working capital requirements, while they
continue distributing dividends, their credit quality could deteriorate.
--AES El Salvador's ratings could be negatively affected by any combination of
the following factors: deterioration of macroeconomic conditions in El
Salvador that could affect subsidies payments from the government;
deterioration of credit metrics; shortages of electricity supply resulting in
lower consumption and lower cash flow generation; further political or
regulatory intervention that negatively affects the company's financial
--AES El Salvador's ratings could be positively affected by a sustainable
leverage reduction; regulatory stability; and improving macroeconomic
conditions in El Salvador.
Additional information is available at 'www.fitchratings.com'. The ratings
above were solicited by, or on behalf of, the issuer, and therefore, Fitch has
been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 8, 2012).
Applicable Criteria and Related Research
Corporate Rating Methodology
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