Author: AtlanticIS

Corporates

Moody’s assigns first-time Baa2 ratings to Enel Chile and its proposed notes

AtlanticIS

New York, May 30, 2018 — Moody’s Investors Service (“Moody’s”) assigned a Baa2 first-time Issuer Rating to Enel Chile S.A. The outlook is stable. At the same time, Moody’s assigned a rating of Baa2 to the up to $1.0 billion proposed senior unsecured notes due 2028.

The proceeds of the issuance will be used to refinance outstanding borrowings, the proceeds of which were used to fund the acquisition of minority shares of its subsidiary Enel Generacion Chile S.A. (Enel Generacion, Baa1 stable) as part of the corporate reorganization concluded in April 2018, which included the incorporation of a new subsidiary Enel Green Power Chile S.A. (EGP Chile).

The Baa2 Issuer Rating reflects Enel Chile’s leading position in the Chilean generation and distribution markets combined with a strong commercial policy, reflective of a relatively comfortable contracted position at prices which are substantially above system marginal costs. Enel Chile benefits from a diversified and efficient energy generation fleet on a consolidated basis, with generation capacity above its short and medium term contracted positions. Furthermore, the issuer has committed to a modest capital investment program focused on increasing its participation in wind and solar power generation projects accompanied by long term power purchase agreements (PPAs).

Credit metrics are expected to remain strong, with CFO pre WC to debt and Interest Coverage expected to be above 25% and 6.5x, respectively, with a comfortable liquidity position. The rating further considers the structurally subordinated nature of the holding company debt to debt at its operating companies. Despite the large representation of holding company debt (expected to be approximately 35%-40% of total consolidated debt), the debt-free nature of subsidiary Enel Distribucion Chile S.A. (Enel Dx) somewhat offsets the issue despite its low representation of total EBITDA (approximately 17% – 20%) and expected dividend distributions (approximately US$50 million per year).

The Baa2 debt rating assigned to the proposed notes maturing in 2028 reflects their senior unsecured nature. The proposed bond indenture includes typical representations, warranties, and limitations on the addition of secured debt and engaging in sale-leaseback transactions. The indenture does not include financial covenants.

Enel Chile is the largest energy generation company in Chile, with a 28% pro-forma market share in 2017 considering the incorporation of EGP Chile as of April 2018. The company’s diversified energy generation mix, combined with its strong commercial policy, contributes to cash flow predictability. Enel Generacion has more than 20TWh per year under contracts at weighted average prices above US$85/MWh until 2022, while EGP Chile has fully contracted its current and expected generation capacity until 2024. The 17%-20% Ebitda contribution from Enel Dx’s regulated distribution business operating in the country’s largest market provides further comfort. Low geographic diversification, with operations limited to the energy sector in Chile (Aa3 negative), limits the rating.

The necessity to sign and/or renew PPA contracts is an important challenge and a key long term risk exposure. Approximately 35% (committed TWh) of PPAs at Enel Generacion expire by 2025, with the increased participation of wind and solar projects in the matrix leading to a shift in the price deck curve within the Chilean market, as shown in the October 2017 regulated auction. The incorporation of EGP Chile allows the company to manage contractual allocations more efficiently based on each subsidiary’s marginal costs and auction price results.

Currently, there is a moderate capex plan in place. While Enel Generacion’s short term plans are relevant, focused on concluding the Los Condores 150-MW hydro plant and the investments in the Bocamina II plant to improve over environmental issues, it is expected to represent less than 2% of net property, plant, and equipment. EGP Chile has a more ambitious plan, expected to increase installed capacity by 60% by 2024, largely focused on solar plants. In relative terms, Enel Dx’s plans are the largest among the three companies, estimated at 11% of net property, plant, and equipment. On a consolidated basis, capex is viewed as moderate, and estimated at around 6% of net property, plant, and equipment. Despite a strong track record in building generation projects and the relatively low complexity of solar projects, the expected generation capacity growth in EGP Chiles subjects the company to construction execution risks.

Even with the incorporation of a more leveraged company in EGP Chile (approximately 4.3x Debt/Ebitda as of September 2017), the company’s consolidated financial profile remains strong (approximately 2.9x Debt/Ebitda as of March 2018), underpinned by the low leverage of Enel Generacion and only intracompany debt at Enel Dx. We expect the company to post consolidated CFO pre WC to Debt and Interest Coverage ratios ranging between 25% – 30% and 6.5x — 7.5x, respectively, over the next five years.

The proposed senior unsecured notes are expected to partially address the company’s most immediate debt maturities, composed of the bridge loans in total amount of US$1.5 billion due in 2019. As of March 2018, the company’s total consolidated cash position was of approximately $650 million. Consolidated committed credit facilities at subsidiary levels, in total amount of more than US$300 million, further support the company’s liquidity profile.

The stable outlook reflects our expectation that Enel Chile’s subsidiaries will continue to successfully execute its commercial policy by focusing on extending its contracted position while maintaining strong credit metrics.

Infrastructure

Moody’s Affirms A3 Rating of Peruvian CRPAO Backed Transactions; Outlook Stable

AtlanticIS

New York, September 11, 2018 — Moody’s Investors Service (“Moody’s”) affirmed the A3 ratings assigned to the senior secured notes issued by Interoceanica IV Finance Limited, Peru Enhanced Pass-Through Finance Limited and IIRSA Norte Finance Limited. The outlooks are stable.

RATING RATIONALE

Today’s rating action considers that the financing structures for the aforementioned transactions are performing as expected and remain closely linked to the credit quality of the Government of Peru (A3 stable). The transactions are backed by Certificados de Reconocimiento de Derechos del Pago Annual por Obras (“CRPAOs”) issued by the Government of Peru. The CRPAOs are unconditional, irrevocable, fixed, US dollar denominated obligations of the Government of Peru. Once issued, the right of the CRPAO holder to collect the GOP payment is not subject to the company’s performance levels or by any other circumstances including destruction of the works performed, change of control of the company, or breach or termination of the Concession Agreement.

Given that the construction related to the CRPAOs that are pledged to the payment of the Notes on the three transactions is complete, all of the related CRPAOs have been purchased. Thus, the payment of debt service on the senior secured notes depends entirely on the payment of the CRPAOs by the Ministry of Transportation and Communication (“MTC”) of the Government of Peru. As such, the ratings and outlooks assigned to the transaction are closely linked to the rating and outlook of the Government of Peru.

The rating outlooks are stable reflecting the outlook on the Government of Peru’s rating.

WHAT COULD CHANGE THE RATING UP/DOWN

Given the structure of debt payments which rely on the Government of Peru’s ability and willingness to budget and appropriate CRPAO payment obligations annually, the rating of the project is closely tied to the sovereign rating of Peru. Conversely, A failure of the Government of Peru to honor any annual payments or concession termination without adequate compensation could have negative implications on the rating. Any changes in the rating of the Government of Peru would likely impact the rating of the debt obligations.

Given that the Notes’ structures de-link the transaction with the underlying assets’ volume and tariff risk (toll roads), and the exposure to the Government of Peru, the methodology used for these ratings is the Generic Project Finance methodology.

 

Corporates

Moody’s assigns Ba2/Aa3.br ratings to Cyrela’s proposed up to BRL 405 million debentures; stable outlook

AtlanticIS
Sao Paulo, May 11, 2018 — Moody’s América Latina Ltda. (“Moody’s”) assigned Ba2 / Aa3.br ratings to Cyrela Brazil Realty S.A. Empreendimentos E Participações (“Cyrela”)’s proposed up to BRL 405 million senior unsecured debentures due in 2022. The outlook for the rating is stable.

Cyrela’s Ba2/Aa3.br ratings are supported by its solid position in the Brazilian homebuilding market, with a strong brand name, good diversification in terms of product offerings and experienced management team. Additional credit positives include the company’s still-adequate operating performance even in adverse market conditions, good liquidity and low leverage.

At the same time, a slow and gradual recovery in Brazil’s homebuilding industry will likely translate into more soft revenue and lower new housing start growth rates, and reduced business opportunities, which will keep Cyrela’s operating performance below pre-recession levels at least until year-end 2018. Another credit concern is Cyrela’s long-term receivables from finished units, which expose the company to client delinquency risk.

Cyrela’s operating performance deteriorated during the downturn in Brazil’s homebuilding industry, but remained generally strong. The company’s revenues declined to BRL2.7 billion in 2017, 54% less than that in 2014, but adjusted gross margins remained stable at 30%-36%. While we expect revenues to remain at around BRL3.0 billion in 2018, with recovery only likely from 2019 onward, free cash flow should continue high at around BRL400-500 million in 2018 on the fast pace of inventory monetization and lower new housing starts.

As well, Cyrela’s leverage ratio will continue to decline as the company amortizes at least a portion of its upcoming debt maturities and remains prudent in managing creditor and shareholder returns to preserve its creditworthiness. The company’s leverage ratio declined to 29.6% at the end of 2017 from 34.3% a year earlier due to lower funding requirements for new projects and to Cyrela’s strategy to adequate its capital structure to the lower sales environment in Brazil.

Cyrela’s liquidity profile is also good, with BRL1.1 billion in cash and equivalents at the end of March 2018, sufficient to cover total reported short-term debt maturities by 0.9x. Furthermore, Cyrela has around BRL1.4 billion in receivables from finished units that should become available with the effective transfer of mortgages to lending banks and ample availability of committed project loans under the SFH program. The proposed debentures will enhance the company’s financial flexibility further and allow it to use cash in excess to amortize upcoming debt maturities, thus lengthening its debt maturity schedule. Pro forma for the transaction, we expect Cyrela’s cash coverage of short term debt to increase to 1.3x.

The proposed senior unsecured debentures will be effectively subordinated to Cyrela’s existing secured debt. Despite the effective subordination they are rated at the same level as Cyrela’s CFR given the high amount of unencumbered assets that covered unsecured debt by 4.3x at the end of 2017 based on our estimates and that in case of a default should provide good recovery for the unsecured instruments. At the end of 2017, approximately 60% of Cyrela’s outstanding debt was secured, mainly related to SFH loans that are secured by specific real estate assets.

The stable outlook reflects our expectation that the deterioration in the company’s operating performance and in Brazil’s homebuilding industry has bottomed out, and both the company’s performance and the industry will recover slowly and gradually in the next 12-18 months.

A rating upgrade would depend on an upgrade of Brazil’s (Ba2 stable) sovereign rating. A rating upgrade would also require the total debt to-capitalization ratio to remain consistently below 40% (29.6% in 2017) and EBIT interest coverage to increase above 4.5x (0.9x in 2017).

A downgrade could be triggered if there is a material deterioration in Cyrela’s cash availability to cover short-term debt (0.9x in March 2018), or if the total debt-to-capitalization ratio increases to above 50% for an extended period. A meaningful increase in the proportion of secured debt or a decrease in the amount of unencumbered assets that could be used to pay down unsecured debt could also result in a downgrade of Cyrela’s unsecured ratings. A downgrade of Brazil’s sovereign rating would also trigger a downgrade of Cyrela’s ratings.

Founded in 1962 and headquartered in São Paulo, Brazil, Cyrela has a history of over 50 years in the homebuilding market and is one of the largest fully integrated homebuilders in the country, with operations in the low, middle and high income housing segments. In 2017, Cyrela reported net revenue of BRL2.7 billion ($837 million) and net losses of BRL95 million ($29 million), mainly related to non-cash provisions.

Banking

Moody’s raises outlook for Spanish banking system to positive as troubled assets decline

AtlanticIS

Madrid, June 12, 2018 — Moody’s has raised its outlook for Spain’s banking system to positive from stable, as robust economic growth and disposals of troubled assets help banks bolster their asset quality. In the rating agency’s view, other fundamental factors such as capital, funding and liquidity levels and profitability will remain stable.

Stocks of non-performing loans have been falling since peaking in January 2014 and Moody’s expects the improvement to continue over the 12 to 18 month outlook period.

Solid economic growth will support a stable operating environment. While Moody’s expects growth to slow to 2.7% in 2018 and 2.3% in 2019, Spain’s economy is still among the fastest growing in the euro area. This robust growth should extend a multi-year decline in unemployment and support improved credit conditions for Spanish banks.

Capital will remain stable at low levels for Spanish banks as their large volume of deferred tax assets, which Moody’s considers to be a low-quality form of capital, undermines their capital strength.

Moody’s forecasts that bank profitability will remain broadly stable over the next 12 to 18 months. Higher fee and commission income will compensate for declining net interest income, with revenues benefiting from more diverse earning sources. Moody’s also expects the cost of risk to remain broadly stable.

Funding and liquidity conditions will also be stable over the outlook period. Stable deposits and shrinking loan books have narrowed the funding gap at Spanish banks in recent years, though this process will decelerate as demand rises for credit.