Fitch Ratings has affirmed the ratings of AES Corporation (AES), including its 'B+' Issuer Default Rating (IDR), following today's announcement that it has reached a definitive agreement to acquire DPL Inc. (DPL) in an all cash transaction valued at approximately $4.7 billion including the assumption of $1.2 billion of DPL debt. At the same time, Fitch has downgraded and placed on Rating Watch Negative DPL's IDR to 'BBB+' from 'A-' and the IDR of its primary subsidiary, Dayton Power & Light Company (DP&L) to 'BBB+' from 'A'. A complete list of rating actions follows at the end of this release.
After completion of the transaction, DPL will become a wholly owned subsidiary of AES. Under the terms of the agreement, DPL shareholders would receive $30 for each share held. AES has secured bridge financing for the acquisition. Permanent financing will consist of $1.25 billion of debt to be issued at DPL (non-recourse to AES), $2.05 billion of parent debt at AES and balance with cash on hand.
The transaction is subject to several state and federal approvals such as the Public Utilities Commission of Ohio, the Federal Energy regulatory Commission and the customary antitrust review under hart-Scott-Rodino Act, as well as approval of DPL shareholders. AES expects to complete the transaction by the first quarter of 2012.
Fitch views the acquisition of a regulated utility supportive of AES' credit quality since it increases the contribution of stable, regulated earnings in the overall portfolio mix, thus, lowering the business risk. Fitch estimates that the regulated cash flows from DPL will be approximately 20% of the consolidated cash flows. The re-leveraging at the parent level reflects in large part the re-issuance of corporate debt that was paid down in 2010 from $1.58 billion of equity sale proceeds received from China Investment Corporation (CIC). The impact on AES' credit metrics from the resulting incremental leverage is largely offset by cash flow contribution from DPL, which comprises upstream dividend payments and benefit to AES of including DPL in its tax filing.
The ratings of AES reflect the diversity of subsidiary distributions, the stability of cash flows from contracted generation and distribution utilities, the high level of corporate debt, which is subordinate to its non-recourse project debt and the event risk associated with investments in developing markets. Fitch expects an increase in distributions from recently completed projects and projects to be completed in coming years that are currently either under development or in construction. The potential for further weakening of global economies is a credit concern.
The downgrade of DPL and placement on Rating Watch Negative reflect the expected substantial weakening of the company's credit profile from the proposed issuance of approximately $1,250 million of acquisition debt resulting in a highly leveraged capital structure. Fitch estimates that pro forma for the debt issuance, DPL's projected 2012 Funds Flow From Operations/Debt ratio will fall by roughly half to 15-17% range. Should the acquisition be consummated on terms and conditions as outlined by AES, a further downgrade of DPL is likely although Fitch expects DPL to retain an investment grade rating. Pro-forma for the acquisition debt, Fitch expects DPL to maintain an EBITDA/Interest coverage measure above 4.0x in 2012.
Similarly, the downgrade of DP&L reflects Fitch's expectation that the leveraged intermediate parent DPL will rely heavily on upstream dividend payments from its subsidiary in order to meet the debt servicing requirements of its additional $1,250 million debt burden. Given the utility's strong financial condition and conservative leverage profile, Fitch cannot rule out additional leverage at the utility. A further downgrade of DP&L is possible depending upon the terms of any ring-fencing provisions that may be required by the Public Utility Commission of Ohio. Fitch expects DP&L's IDR to remain in the investment grade category.
Fitch expects the corporate and financing structure of DPL and DP&L to mirror that of AES' other domestic regulated utility and holding company, Indianapolis Power & Light and IPALCO. Given the terms of conditions of the proposed acquisition by AES, even if the acquisition is not completed, Fitch believes that DPL would likely entertain or engage in other transactions that would be inconsistent with its ratings prior to the announced transaction and management has demonstrated a higher threshold for financial leverage than Fitch had previously factored into its ratings.
Fitch has affirmed the following ratings with a Stable Outlook:
AES
--Long-term IDR at 'B+';
--Senior Secured debt at 'BB+/RR1';
--Senior Unsecured debt at 'BB/RR1';
--Short-term IDR at 'B'.
AES Trust III
--Trust Preferred at 'B+/RR4'
IPALCO Enterprises, Inc.
--Long-term IDR 'at BBB-';
--Senior secured debt at 'BBB-';
Indianapolis Power & Light Co.
--Long-term IDR at 'BBB-';
--Senior secured debt at 'BBB+';
--Secured pollution control revenue bonds at 'BBB+';
--Unsecured pollution control revenue bonds at 'BBB';
--Preferred stock at 'BB+'.
Fitch has downgraded and placed the following ratings on Rating Watch Negative:
DPL
--Long-term IDR to 'BBB+' from 'A-';
--Senior unsecured notes to 'BBB+' from 'A-'.
Dayton Power & Light Company
--Long-term IDR to 'BBB+' from 'A';
--Senior secured debt to 'A' from 'AA-';
--Preferred stock to 'BBB' from 'A-';
--Short-term IDR and commercial paper to 'F2' from 'F1'.
DPL Capital Trust II.
--Junior subordinated debt to 'BBB-' from 'BBB'.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology', Aug. 16, 2010
--'U.S. Power and Gas Comparative Operating Risk (COR) Evaluation and Financial Guidelines', Aug. 22, 2007;
--'Credit Rating Guidelines for Regulated Utility Companies' (July 31, 2007);
--'Issuer Default Ratings and Recovery Ratings in the Power and Gas Sector' (Nov. 5, 2005);
Applicable Criteria and Related Research:
Corporate Rating Methodology
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=546646
U.S. Power and Gas Comparative Operating Risk (COR) Evaluation and Financial Guidelines
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=338030
Credit Rating Guidelines for Regulated Utility Companies
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=334652
Issuer Default Ratings and Recovery Ratings in the Power and Gas Sector
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=254848
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Contacts:
Fitch Ratings
For AES:
Primary Analyst
Shalini Mahajan,
+1-212-908-0351
Director
Fitch, Inc.
One State St. Plaza
New
York, NY 10004
or
Secondary Analyst
Ellen Lapson,
+1-212-908-0504
Managing Director
or
For DPL:
Primary
Analyst
Kevin Beicke, +1-212-908-9112
Director
Fitch, Inc.
One
State St. Plaza
New York, NY 10004
or
Secondary Analyst
Peter
Molica, +1-212-908-0288
Director
or
Committee Chair
Glen
Grabelsky, +1-212-908-0577
Managing Director
or
Media
Relations:
Brian Bertsch, +1-212-908-0549
Email: brian.bertsch@fitchratings.com