Fitch Ratings has affirmed AES El Salvador Trust's foreign and local currency Issuer Default Rating (IDRs) at 'BB'. The rating action applies to USD300 million of political risk protected (PRP) bond issuance due Feb. 1, 2016. Concurrently, Fitch has affirmed Compania de Alumbrado Electrico de San Salvador (CAESS) and Empresa Electrica de Oriente (EEO) at 'A+(slv)'.
The Rating Outlook for all ratings is Stable. The full ratings list is provided at the end of this release.
AES El Salvador's ratings are based on the combined credit strength of its operating assets and reflect the group's relatively large size compared to the market, low business risk profile, and its predictable cash flow generation resulting from its efficient operating platform. The ratings also consider its relatively high leverage, and the continued sovereign risk exposure through subsidies and intervention. The ratings take into account the weakening macroeconomic conditions in El Salvador.
AES El Salvador Trust is a special-purpose vehicle (SPV) located in Panama that was created to issue USD300 million of notes on behalf of AES El Salvador. AES El Salvador Trust's ratings are based on the combined credit quality of AES El Salvador's operating assets: CAESS, EEO, AES CLESA y Cia (CLESA), and Distribuidora Electrica de Usulutan (DEUSEM). These operating companies are the guarantors of AES El Salvador's outstanding debt issuance.
The company's PRP notes benefit from external liquidity facilities totaling 12 months of interest payments. A six-month debt-service reserve account, coupled with a six-month letter of credit provided by Credit Suisse (CS; acting through its Cayman Islands branch), helps protect against a potential currency inconvertibility/non-transfer event. The facilities will remain available for the life of the notes as long as certain criteria are met. While the stated maturity of the notes is 2016, the notes can be extended by 12 months during an event of transfer and convertibility restrictions.
Large Market Position and Low Risk Business:
Its low business risk reflects the company's stable customer base and 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. The company's operations are considered efficient compared with other distribution companies in the region. The group, on a consolidated basis, has reported energy loses of 8.7% as of December 2011, showing a consistent reduction of energy losses.
The ratings factor in the key player position of AES El Salvador in the country as it serves around 1.2 million of customers with 974 employees, in 2011 sold 3.594 gigawatt hours (GWh) (2010: 3.526 GWh), which represents 67% of El Salvador total energy demand during the year. The area served by AES EL Salvador accounts for over 80% of El Salvador's electricity distribution area market share.
According to changes in the electricity law, distribution companies in El Salvador are now required to enter into long-term contracts to supply their expected demand; by February 2013, distribution companies will be required to have contracts for at least 70% of their peak demand and by July 2016, 80%. AES El Salvador has signed contracts for 449.9MW, representing 65% of the maximum average demand. Given that customers are currently free to transfer between electricity suppliers, this holds the potential for the company to lose demand to other suppliers, yet, still paying wheeling fees to the incumbent distribution company.
Leverage Ratio Remains High:
Average EBITDA during the last four fiscal year accounts USD60.6 million, below the previous historical data around USD81 million, due to the impact of the tariff regime approved for the period 2008 - 2012. As of December 2011, total EBITDA continued to be weak, at USD58 million with total debt of approximately USD300 million, which resulted in a high leverage ratio of 5.1 times (x). AES El Salvador's interest coverage continues to be adequate for the rating category at approximately 2.5x.
Total debt as of December 2011 accounts for USD300 million, maturing in 2016; meanwhile the company uses short-term debt, from time to time, to finance working capital needs. Going forward, the company does not expect material changes in their financial strategy until the release of the new tariff reset. Fitch expects leverage ratio to remain around 5x as a result of the current tariff regime which ends this year, and no significant variation in debt levels. Fitch recognizes the company is exposed to refinancing risk as 100% of its debt comes due in 2016. Historically, AES El Salvador has been able to access bank and debt capital markets.
The next tariff reset, which is yet to be announced and will become effective in 2013, will determine EBITDA levels for the upcoming five years. Leverage ratio could deteriorate if new tariff reset beginning 2013 pressures EBITDA generation to levels around USD50 million. Nevertheless, the adjustments to the methodology tariff calculation, which is still in progress and pending of approval, could modify the scenario of assessment. Fitch will continue monitoring the developments of the tariff reset and the potential impact on ratings.
AES El Salvador's liquidity is supported by its cash on hand, which as of year-end 2011 was approximately USD18.6 million, and a short-term bank credit facility to buy electricity from generators for USD57.5 million. The short-term liquidity pressures were reduced due to quarterly energy cost adjustments through tariff adjustments effective from 2011, instead of the semiannual revision. However, liquidity could be affected in case of higher energy prices for final users that could lead to account receivables aging. Should distribution companies be forced to issue additional debt to fund its working capital requirements, while it continues distributing dividends, its credit quality could deteriorate further.
Exposure to Government Intervention Risk is High:
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. However, the energy subsidy is a relevant matter to the residential consumers; hence the government expects to improve targeting on electricity subsidies. During 2012, energy subsidy payments for customers with consumption up to 200KWh will be paid by the state owned hydroelectric company - Comision Ejecutiva Hidroelectrica del Rio Lempa- (CEL).
The government subsidies consumers with a monthly consumption of 99KWh or less, this subsidy amounted USD81.6 million (USD70 million during 2010). Number of clients subsided (consumption 99KWh or less) amounted to 727,171 which is 61% of total clients as of December 2011. Additionally, the Salvadorian government implemented an extraordinary subsidy for users with consumption below 200 kilowatts (KWh) since October 2011 to date. During 2011, this extraordinary subsidy covered consumption up to 300 KWh from May through September 2011. This subsidy represented USD25.1 million during 2011 to AES El Salvador group.
KEY RATING DRIVERS
--AES El Salvador's ratings could be negatively affected by any combination of the following factors: 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 performance, deterioration of macroeconomic conditions in El Salvador;
--AES El Salvador's ratings could be positively affected by a sustainable leverage reduction; regulatory stability; and improving macroeconomic conditions in El Salvador.
Fitch has taken the following rating actions:
--AES El Salvador foreign and local currency IDR affirmed at 'BB';
--AES El Salvador's USD300 million PRP notes due 2016 affirmed at 'BB';
--Compania de Alumbrado Electrico de San Salvador (CAESS) national scale rating affirmed at 'A+(slv)';
--Empresa Electrica de Oriente (EEO) national scale rating affirmed at 'A+(slv)'.
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. 12, 2011).
Applicable Criteria and Related Research:
Corporate Rating Methodology
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