Author: AtlanticIS

Infrastructure

Eversource Energy’s equity issuance is credit positive

AtlanticIS

United States, June 11, 2020 – Eversource Energy (Baa1 stable) announced that it plans to sell 6 million shares of its common stock, which would raise about $517.6 million in gross proceeds based on the previous day’s closing offering price of $86.26 per share. Eversource intends to grant the underwriters a 30-day option to purchase up to an additional 900,000 common shares. Should the full over-allotment be exercised, total proceeds from the offering could reach $595 million.

The planned equity issuance is credit positive because we expect that Eversource will use the net proceeds to pay down outstanding short-term debt, reduce the amount of debt it would have needed to fund future investments and fund a portion of the utility assets acquisition later this year. Consequently, the company’s cash flow coverage metrics will improve.

The equity issuance is part of a plan Eversource announced last year to issue $2.5 billion of equity. It comes as the company increases its capital investment program and acquires utility assets later this year. The company intends to spend $17.3 billion in its core regulated businesses up to 2024, beginning with more than $3 billion last year. The company also plans to invest significantly in clean energy initiatives during this period, particularly offshore wind.

In February, Eversource announced the acquisition of the Massachusetts natural gas assets of Columbia Gas from NiSource Inc. (Baa2 stable) for $1.1 billion. We expect Eversource to finance the transaction with roughly 50% equity and 50% debt. The company expects the transaction to close by the end of the third quarter. The Columbia Gas assets will become a subsidiary of Yankee Gas Energy System, Inc., an Eversource intermediate holding company.

For the 12 months that ended 31 March, Eversource’s ratio of cash flow from operations pre-working capital changes (CFO pre-W/C) to debt was approximately 14.5%, up from 13% in 2018. Eversource’s 2018 financial results were adversely affected by tax reform, as well as $636 million of securitization bonds issued by utility subsidiary Public Service Company of New Hampshire (A3 stable) in May 2018. Including the benefit of the recently announced equity issuance, increased cash flow generation at its utilities and pro forma for the Columbia Gas acquisition, we expect Eversource’s ratio of CFO pre-W/C to debt to improve to about 15% in 2020 and remain in the mid-teens in the coming years.

Headquartered in Hartford, Connecticut, and Boston, Eversource is a utility holding company of mostly regulated utilities including electric, gas and water transmission and distribution companies. With a total rate base of about $19.6 billion, Eversource is the largest utility system in the New England region, serving approximately 4 million electric, natural gas and water customers.

Credit Outlook: 15 June 2020. Pg. 10
Moodys

Banking

Chilean central bank measures will support banks’ funding and liquidity

AtlanticIS

Chile, June 16, 2020 – The Chilean central bank (BCCh) announced a $16 billion expansion of its Conditional Financing Facility for Incremental Lending (FCIC) program and introduced an $8 billion special asset purchase program as the coronavirus pandemic continued to spread across Chile, raising the prospect of an extension of the lockdowns. These measures together represent 10% of GDP and will add toBCCh’s original $8 billion bond purchase program and previously approved credit lines under the FCIC program totaling $24 billion. The central bank’s new funding will complement a recent $12 billion emergency plan announced by Chile’s President Sebastián Piñera on 14 June.

The expansion of the FCIC will provide Chilean banks with low-cost funds that will support their ability to lend to clients despite the ongoing crisis. Meanwhile, the asset-purchase program will allow banks to convert bonds issued by the BCCh and other banks into cash, supporting liquidity needs related to large-scale interest or principal payment deferrals.

Access to financing will also support companies’ liquidity position, which has worsened significantly because of the crisis and ultimately will increase the future expected recovery for banks on loans to small and midsize enterprises (SMEs) and their employees. Although the additional facility targets higher-risk SME financing, the government’s executive branch earlier announced the expansion of the guarantees offered by the Small Entrepreneur Guarantee Fund (Fogape), which will mitigate asset risks and encourage the further use of the new funding.

The FCIC offers banks cheap financing at the policy rate, which the central bank on 16 June kept unchanged at 0.5%. This rate is well below the average funding rate for Chilean banks of about 2.4% as of March. The lower rate will support profitability at a time when we expect credit costs to remain high because of the higher risks posed by pandemic’s continued spread in Chile, which may extend lockdowns beyond second-quarter 2020. Banks’ loan-loss provisions have already increased to 1.7% of gross loans as of April 2020, from 1.3% in 2019.

Fogape guarantees cover 30%-80% of a loan, mitigating asset risks for banks and have contributed to a robust 6% expansion of banks’ commercial portfolios between April and February. The use of the original FCIC credit lines had already reached about $20 billion, or 83% of the original limit, indicating high demand by Chile’s largest banks. According to the Chilean Bankers Association (ABIF), banks have approved $8.8 billion of loans with a Fogape guarantee, of which $6.4 billion had been disbursed as of 12 June.

Credit Outlook: 22 June 2020. Pg. 8
Moodys

Countries

Airline sector unlikely to fully recover before 2023, faces deep structural change

AtlanticIS

United States, June 04, 2020

  • Air passenger demand will remain severely depressed in 2021, will not see a substantial recovery before 2023. Health concerns, changes in corporate travel policies, potential restrictions on international arrivals, and lower discretionary spending because of weaker GDP and higher unemployment will constrain air passenger demand into 2022. Demand in 2023 could approach that of 2019, but the uncertain timing of the coronavirus receding on a more permanent basis makes forecasting a challenge.
  • Many airlines have improved liquidity, but at the cost of rising debt burdens. Stronger and state-supported airlines have significantly improved liquidity since March. Rated airlines have sufficient liquidity to survive on average for about 450 days at current low activity levels. For weaker airlines, this may be insufficient if groundings persist into 2021.
  • We model two scenarios assuming a recovery by 2023 or later years. Most airlines will carry substantially more debt
    in 2023    . Our faster and slower recovery cases assume 2023 passenger volumes recover to around 95% and 85% of 2019 levels, respectively. The airlines we rate will carry on average 20%-30% more debt in 2023 compared with 2019, with leverage on average 0.5x-1.5x higher.
  • We have downgraded 13 airlines since 25 May 2020, and confirmed six. We placed ratings for 22 airlines on review for downgrade in March. The sufficiency of liquidity, and the potential for individual companies to retire the debt incurred to restore credit metrics through 2023 were key considerations in resolving the reviews.
  • The industry will undergo substantial permanent structural changes. Potential for failures of weaker airlines and government intervention to leave fewer, larger companies, polarised between more efficient operators and strategic state-supported airlines. Health screening and risks of denied boarding will affect travelers potentially beyond the pandemic. Corporate travel is likely to be impaired into 2023. Governments may require deeper carbon emissions reductions from airlines.
  • There will be deep repercussions across related sectors, particularlycommercial aerospace manufacturers and suppliers, airports, travel distributors and airline service companies. Providers of jet fuel and aircraft lessors will also be deeply affected. By contrast, carbon dioxide emissions will reduce by 750-900 million tonnes over 2020-21.

Credit Outlook: 8 June 2020. Pg. 35
Moodys

Countries

Tightening financial conditions will increase Latin American sovereigns’ funding costs, weaken debt affordability

AtlanticIS

Latin America, May 11, 2020 – Sovereigns in Latin America (LatAm) are facing the coronavirus shock with higher debt and interest burdens and less overall fiscal space than they had during the 2015-16 commodity price shock. At the same time, investor risk perceptions toward emerging markets have deteriorated, rendering financing conditions less favorable.
LatAm sovereigns will face increased funding challenges this year as they post larger deficits amid higher health-related spending, lower tax revenue intake as economies contract, and countercyclical fiscal measures, which include higher spending and tax payment delays in some cases. With access to the global financial markets affected by higher risk perceptions, persistent volatility and higher crossborder funding costs, sovereigns in the region will likely rely on alternative sources of funding (e.g., multilateral funding, local markets, fiscal buffers) to cover the anticipated increase in their borrowing needs.


» Fiscal metrics will deteriorate across the region as debt and interest burdens rise. We expect LatAm sovereigns to come out of the coronavirus crisis with weaker fiscal metrics. As the region’s economies contract and governments post wider fiscal deficits this year, debt burdens will rise by seven percentage points of GDP on average, with the median LatAm debt burden reaching 54% of GDP. And as debt stocks grow and borrowing costs rise, the median interest-to-revenue ratio in LatAm will increase to 13.7% in 2020 – almost two percentage points higher than in 2019.


» Risk differentiation by investors have led to uneven changes in relative borrowing costs across LatAm compared to prior episodes of financial volatility. Since March, spreads have widened more than in previous episodes of market volatility, including the 2013-14 “taper tantrum” period. But this time around, there is significant risk differentiation between lower rated sovereigns.
Although the benchmark US treasury rate has been declining, the average LatAm sovereign’s borrowing costs are almost 200 basis points higher than at the beginning of the year.


» Funding strategies to cover coronavirus response will be influenced by market conditions. Higher yields reflecting increased sovereign credit risk premiums will influence funding mix decisions through the rest of the year. We expect governments to rely more extensively on multilateral financing, local borrowing and other funding sources to cover wider fiscal deficits. Because governments will likely gravitate toward funding mixes that minimize interest costs for borrowings, this can partially mitigate the deterioration we anticipate in debt affordability.

Credit Outlook: 14 May 2020. Pg. 36
Moodys

Infrastructure

Air traffic restrictions until September are credit negative for Aeropuertos Argentina 2000

AtlanticIS

Argentina, April 27, 2020 – Argentina’s aviation agency Administración Nacional de Aviación Civil (Argentina) or ANAC, announced that all commercial air traffic, international and local, will remain restricted until 1 September. The restriction is credit negative for Aeropuertos Argentina 2000 S.A. (AA2000, Caa3 negative) because it will receive no passenger revenue until September and the prolonged restriction comes in the middle of an exchange offer process that AA2000 initiated on 21 April to extend its 2020 debt amortization payments until May 2021.
ANAC’s resolution does not mean that there will be no flights through September, but instead flights will be pre-approved by ANAC on a case-by-case basis. We expect flights through September to be very limited.
AA2000 is working on several cost-saving measures to preserve its cash position, including lowering capital expenditures to a minimum and suspending all pending construction works, among others, in addition to the additional liquidity relief the company is seeking to obtain through its debt exchange offer.
Air traffic in Argentina continued operating normally until mid-March when the transportation ministry suspended all commercial air traffic, in line with government-mandated national movement restrictions in response to coronavirus. Pre-coronavirus AA2000 traffic trends were solid. Total traffic growth in 2019 was at 9% over the previous year, but the company now expects traffic to drop as much as 48% for 2020 (see Exhibit 1).

Sources: AA2000 and Moody’s Investors Service

AA2000 offered to exchange its outstanding $350 million 6.875% senior secured notes due in 2027 for newly issued 6.875% cash/9.375% payment-in-kind (PIK) Class I Series 2020 additional senior secured notes due in 2027.
Terms of the Series 2020 additional notes will be largely identical to the existing notes, but the quarterly interest payment originally scheduled to be paid in cash on 1 May 2020 will be paid in cash in the form of an interest premium or by a PIK by increasing the principal amount of the additional notes to be issued on the settlement date. Furthermore, quarterly interest payments originally scheduled to be paid in cash on the existing notes on 1 August and 1 November 2020 and 1 February 2021 will be by PIK at a rate of 9.375% per year (see Exhibits 2 and 3). Quarterly amortization payments originally scheduled for 1 May 2020 through 1 February 2021 will be deferred to begin 1 May 2021 and continue under a new principal amortization schedule until maturity. The Series 2020 additional notes and the existing notes will be secured by the same collateral on a pro rata and pari passu basis in accordance with the Indenture and the related collateral documents.
It is a condition of the exchange offer, among others, that at least 80% of the existing notes’ outstanding principal amount is validly tendered for exchange and not withdrawn. The company does not expect to modify the offer terms despite the traffic suspension.

Source: AA2000

AA2000 was incorporated in 1998 after winning the national and international bid for the concession rights for 35 airports that handle more than 90% of Argentina’s arriving and departing passengers and include the three airports that serve the capital city of Buenos Aires – Ezeiza (EZE), Aeroparque (AEP) and Palomar (EPA) Airports.

Credit Outlook: 4 May 2020. Pg. 8
Moodys