Fitch Expects to Rate AES Gener's Proposed USD450MM Hybrid Notes 'BB'
CHICAGO -- November 25, 2013
Fitch Ratings expects to assign a long-term rating of 'BB' to AES Gener S.A.'s
(Gener) proposed USD450 million junior subordinated (hybrid) notes issuance
due 2073. Gener expects to use the proceeds from the issuance to finance its
equity contribution for the Alto Maipo and Cochrane projects as well as to
repay upcoming maturities and for general corporate purposes.
These hybrid notes will receive a 50% equity credit given that interest
payments on the notes are deferrable at the company's discretion and are
compounded at the applicable interest on the notes. Also, the notes'
subordinated ranking provides loss absorption for more senior indebtedness of
Successful completion of this transaction and eventual financial closing of
the Alto Maipo project financing will result in a one notch downgrade of
Gener's Issuer Default Ratings and senior unsecured debt to 'BBB-' from 'BBB'
as a result of the increased execution risk associated with the company's
expansion projects, namely its investment in Alto Maipo. The downgrade also
reflects the resulting high consolidated leverage, which is more in line with
the 'BBB-' rating. The company's hybrid proposed debt issuance, which Fitch
expects to rate at 'BB', will not be downgraded with the aforementioned
downgrade given that the issuance impact on the company's credit quality has
already been incorporated in to the rating.
As a result of this proposed debt issuance, the company's consolidated
leverage is expected to increase above 4.5 times (x) by 2015, which is
considered to be more in line with the 'BBB-' rating. Alto Maipo's future
power generation is only partially contracted given that its generation varies
with hydrological conditions and as a result cash generation from this project
is subject to greater volatility. These facts are not fully mitigated by the
project-finance like financing. Also, Gener has an ambitious expansion program
that includes the simultaneous construction of Cochrane, a 532MW thermo
electric power plant, in addition to the Alto Maipo project, which is a 531MW
of installed capacity run-of-the river generation plant. In conjunction, these
projects will add 1,063MW of capacity, with an associated investment of USD3.2
billion. The magnitude of the projects adds to Gener's execution and
Gener's ratings are supported by the company's solid credit metrics, balanced
contracted position and diverse portfolio of generating assets. The ratings
also recognize that its major plants operate under constructive regulatory
environments. Credit risks include possible environmental and/or political
issues, which could result in cost overruns or additional modifications in new
projects. The credit risks also include the regulatory uncertainties in
Argentina related to Termoandes S.A. and pressures from the controlling
shareholder AES Corp. to increase dividends, although these risks appear
KEY RATING DRIVERS
Good Financial Performance
Despite a slightly over contracted position relative to the company's
efficient energy generation in Chile in 2012, Gener's credit quality measures
were within guidelines for its rating category. For the last 12 months ended
Sept. 30, 2013, the company's consolidated EBITDA coverage and debt-to-EBITDA
metrics were 4.3x and 3.1x, respectively. Excluding the non-recourse debt of
Angamos power plant, Gener's debt-to-EBITDA was solid at 2.5x. Consolidated
EBITDA was USD655 million in Sept. 30, 2013, consistent with Fitch's
expectations. In year-end 2013, EBITDA is expected to remain at similar
Rising Capital Expenditures
Gener initiated construction in March of 2013 of its 532MW Cochrane coal
project in SING, with estimated investment of approximately USD1.3 billion.
This project is being financed through a project -finance type debt that is
non-recourse to Gener. The company is also analyzing the 531MW Alto Maipo
hydroelectric project, though this project is in preliminary works and expects
to start construction before the end of 2013. A similar project financing
structure is being pursued for Alto Maipo.
In the Cochrane project, Gener has incorporated Mitsubishi Corporation as a
shareholder with a 60%/40% stake, respectively. Construction risk is likely to
be mitigated by the selection of the same constructor that the Angamos project
(Posco Engineering & Construction) which completed the project on budget and
before schedule, and was also the constructor of the Nueva Ventanas and
Ventanas IV plants. In addition, the project will be located beside the
Angamos plant, which adds its experience in the port and coal stock
management. Commercial risk is mitigated by solid counterparties and/or the
existence of guarantees. In Alto Maipo, Gener incorporated Antofagasta
Minerals S.A., a Chilean mining company, as 40% shareholder.
As of Sept. 30, 2013, Gener's consolidated liquidity was USD382 million,
enhanced by access to committed credit lines for USD275 million. USD 170
million of the liquidity is restricted. Short-term debt was USD271 million. In
2014, Fitch expects Gener to refinance its USD317 million debt maturities.
High Dividend Payment
Gener has a track record of high dividend payments. Cash flow could be
pressured in the upcoming expansion phase should this policy be maintained.
A change in Gener's commercial policy that results in an imbalanced long-term
contractual position, and/or a material and sustained deterioration of credit
metrics (reflected in a non-recourse debt-to-EBITDA ratio greater than 3x and
EBITDA-to-interest coverage below 3x) could result in a negative rating
action. Fitch believes that a positive rating action is limited at this time
due to the expected capacity expansion over the next few years.
Gener is the second largest electricity generation company in Chile, as it
operates 22% of the country's total generating capacity (4,081 MW, including
its investments in Guacolda). The company has ownership interests in electric
generation in Colombia and Argentina. Gener is indirectly owned by AES
Corporation (71%). AES Corporation is one of the world's largest global power
companies. With operations in five continents, the company is active in the
generation and distribution of electricity. The company controls more than
40,000 MW of capacity.
Fitch currently rates Gener's ratings as follows:
--US$400 million, 2014 notes at 'BBB';
--US$400 million, 2021 notes at 'BBB';
--UF$4.4 billion, 2028 notes Series N at'A+(cl)';
--UF$1.2 billion, 2015 notes Series O at 'A+(cl)';
--US$196 million, 2019 notes Series Q at 'A+(cl)';
--US$200 million Bond Program at 'A+(cl)';
--US$400 million Bond Program at 'A+(cl)'.
Additional information is available at www.fitchratings.com.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 5, 2013);
--'National Scale Ratings Criteria' (Oct. 30, 2013).
Applicable Criteria and Related Research:
Corporate Rating Methodology: Including Short-Term Ratings and Parent and
National Scale Ratings Criteria
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Daniel R. Kastholm, +1-312-368-2070
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
Paula Garcia Uriburu, +562-499-3300
Joe Bormann, +1-312-368-3349
Elizabeth Fogerty, +1-212-908-0526
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