Fitch Affirms ISA Capital do Brasil's IDRs at 'BB+'/'AA-(bra)'; CTEEP's IDR
CHICAGO -- August 27, 2013
Fitch Ratings has affirmed ISA Capital do Brasil S.A.'s (ISA Capital) foreign
and local currency Issuer Default Ratings (IDRs) at 'BB+', and its National
scale rating at 'AA-(bra)'. In addition, Fitch has affirmed the company's
USD31.6 million of senior secured notes outstanding at 'BBB-'. The Rating
Outlook is Stable.
Concurrently, Fitch has affirmed Companhia de Transmissao de Energia Eletrica
Paulista S.A.'s (CTEEP) National scale long-term rating at 'AA+(bra)'. The
rating action applies to approximately BRL500 million of outstanding
debentures maturing in 2014 and 2017. The Rating Outlook is stable.
KEY RATING DRIVERS
ISA Capital's ratings reflect the strong credit quality of CTEEP, its sole
revenue source and only operating asset. CTEEP's strong credit quality is
attributable to the company's monopoly position, its stable and predictable
operating cash flow and its financially sound credit profile. The ratings also
reflect the noteholders' structural subordination to CTEEP's obligations.
The one-notch rating uplift for ISA Capital outstanding bonds reflects its
enhanced recovery prospects due to the refinancing of the majority of its debt
with (subordinated, debt-like) preferred equity. The 2017 bonds are currently
over-collateralized. The USD31.6 million (BRL57 million) of outstanding debt
is secured by 60% of ISA Capital's shares in CTEEP, a stake which is currently
valued at approximately BRL1.4 billion based on CTEEP's current market
capitalization value of BRL6.1 billion.
ISA Capital's credit quality reflects the company's structural subordination
to CTEEP's obligations given that ISA owns only 37.8% of its total capital and
does not receive the full benefits of operating cash flow. CTEEP's leverage is
considered adequate for the rating category, and ISA Captal's capital
structure has marginally improved since the company repurchased the bulk of
its debt outstanding and refinanced it with preferred equity. As of Dec. 31,
2012, ISA Capital's consolidated debt amounted to approximately BRL5 billion.
This debt consisted of approximately BRL3.7 billion at CTEEP and its
subsidiaries and BRL1.2 billion at ISA Capital (including its preferred
shares). This translates into a leverage ratio of 3.4x on a consolidated
STRONG CREDIT METRICS:
CTEEP's cash flow generation and cash flow distributions (dividends) to ISA
Capital are stable and predictable. ISA Capital's consolidated funds from
operations (FFO) interest coverage ratio of approximately 15x as of Dec. 31,
2012 was considered strong for the rating category. During 2012, ISA Capital
received approximately BRL200 million of dividends from CTEEP. Going forward,
distributions from CTEEP are expected to range between BRL100 million and
BRL200 million per year, down from the previous expectation of BRL250 million
to BRL300 million, which reflects CTEEP's revised cash flow profile after the
company accepted the government's proposal to renew its main concession for
lower tariffs early. ISA Capital is expected to use the proceeds it receives
from CTEEP, together with its cash on hand (which stood at approximately
BRL422 million as of December 2012) to pay dividends on preferred equity and
service the remaining portion of the 2017 bonds not tendered during 2010.
LOW BUSINESS RISK:
CTEEP's monopoly position stems from its exclusive right to provide
electricity transmission services through its multiple concessions.
Furthermore, two CTEEP concessions are located in the state of Sao Paulo,
which accounts for one-third of Brazil's overall GDP, making it one of the
largest electricity consumers in the country. CTEEP's strong market position
should further benefit the company when it participates in future bids for new
STABLE CASH FLOW GENERATION:
CTEEP cash flow generation is very stable and predictable, exhibiting the low
business risk profile of an electric transmission utility company. CTEEP's
revenues are exempt from volumetric risk as its maximum permitted annual
revenue (PAR) is based on the electricity transmission assets available to
users, instead of the transmitted electricity. The company's cash flow
generation saw a significant decrease at the end of 2012 given that the
company accepted a government proposal for early renewal of its main
concession which expires in 2015 for an upfront payment of approximately
BRL2.9 billion and an additional compensation to be paid during the next 30
years of the concession. CTEEP intends to use the proceeds from the upfront
payment to repay debt as it becomes due in order to maintain a capital
structure that is in line with the new cash flow generation profile. Fitch
expects ISA Capital's consolidated leverage to range between 2.0x and 3.0x
NEUTRAL CREDIT IMPACT FROM CONCESSION RENEWAL:
CTEEP's decision to accept the government's proposal to renew its concession
had a neutral impact on the company's credit profile, considering the
expectation that CTEEP will use its upfront payment compensation to pay down
debt. In order to do the early renewal of CTEEP's main concession, and reduce
the company's tariffs for it, the Brazilian Ministry of Mines and Energy (MME)
offered CTEEP an upfront payment of approximately BRL2.9 billion and an
estimated additional BRL3 billion which will likely be paid over the 30-year
life of the new concession period. CTEEP received approximately BRL1.4 billion
of the upfront payment in January 2013 and is receiving the remaining portion
in 31 equal monthly installments until July 2015. As a result of receiving
these proceeds, CTEEP's consolidated cash on hand as of June 2013 stood at
BRL1.2 billion, which compares favorably with the company's short-term
obligations of approximately BRL550 million.
The concession renewal process has somewhat affected CTEEP's ability to
upstream cash to its controlling shareholder through dividend payments. As
aforementioned, going forward, dividend distributions from CTEEP to ISA
Capital are expected to range between BRL100 million and BRL200 million per
year, down from the previous expectation of between BRL250 million to BRL300
million, which reflects CTEEP's revised cash flow profile. This revised cash
flow will create challenges for ISA Capital to meet its preferred share buying
program, which aims at acquiring the BRL1.2 billion of preferred shares
between 2013 and 2016 in four equal repurchase of BRL300 million per year.
Considerations that could lead to a positive rating action (in the rating or
Outlook) include improving macroeconomic conditions in Brazil coupled with a
Sovereign rating upgrade and a continuously strong corporate financial
Considerations that could lead to a negative rating action (rating or Outlook)
for ISA Capital include any changes in CTEEP's credit quality, which could be
negatively affected by a significant or above-expectation increase in
leverage; regulatory intervention in the tariff adjustment process; and if
relevant off-balance-sheet contingencies become mandatory.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 2013);
--'Parent and Subsidiary Rating Linkage Criteria Report' (Aug. 2013);
--'Equity Credit for Hybrids & Other Capital Securities' (Dec. 29, 2009).
Applicable Criteria and Related Research:
Equity Credit for Hybrids and Other Capital Securities: Market Feedback and
Parent and Subsidiary Rating Linkage
Corporate Rating Methodology: Including Short-Term Ratings and Parent and
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Lucas Aristizabal, +1 312-368-3260
Fitch Ratings, Inc.
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