Author: AtlanticIS

Corporates

VTR Finance’s acquisition of Telefónica assets strengthens Costa Rican business for parent LLA

AtlanticIS

Costa Rica, July 30, 2020 – Liberty Latin America Ltd. (LLA), the parent of VTR Finance N.V. (Ba3 stable), announced a $500 million deal to acquire Telefónica S.A.’s (Baa3 stable) subsidiary Telefónica Costa Rica. LLA intends to include Telefónica Costa Rica in the VTR credit pool, which will also include Cabletica, LLA’s existing fixed-line business in Costa Rica. Pending regulatory approvals, VTR expects the acquisition to close in the first half of 2021. LLA will increase its market share in Costa Rica, and cost synergies will improve the combined group’s EBITDA margin in the next two to three years, credit positives for LLA.

The all-cash transaction implies a $500 million enterprise value for Telefónica Costa Rica on a cash- and debt-free basis, equivalent to a 6.0x EBITDA multiple based on Telefónica Costa Rica’s 2019 EBITDA, including projected annual run-rate synergies. But LLA also intends to finance the acquisition with some borrowing from local lenders and from VTR Finance N.V. The deal’s credit implications for the VTR credit pool will depend in part on how much new debt it takes on for the transaction.

The acquisition of Telefónica Costa Rica and its combination with Cabletica will create an integrated telecom operator that will provide a full suite of fixed and mobile services. Buying Telefónica Costa Rica would give LLA ownership of Costa Rica’s second-largest mobile operator, with a market share of around 24%, on top of its number-two fixed-services operator, with Cabletica’s roughly 20% market share for broadband and 25% for pay TV.

We expect that the combination will also result in cost synergies, improving the combined group’s EBITDA margin during the next two to three years. The synergies that LLA expects to generate will effectively reduce the EBITDA multiple of the purchase price to 6.0x from 7.4x based on 2019 data, or an improvement in the target’s EBITDA to about $80 million, including synergies, from $68 million in 2019.

In addition to borrowings in Costa Rica and at VTR Finance N.V., LLA would finance the remainder using its own liquidity and other sources of capital. Although LLA has not confirmed the exact funding mix, the group said that it is targeting about 4x debt on the acquired asset’s EBITDA including synergies, according to LLA’s calculations, implying about $300 million of incremental debt at VTR.

VTR’s Ba3 rating already reflects the contribution of Cabletica, which LLA anticipated to take place in the first quarter of 2021, and an adjusted gross debt/EBITDA ratio that will decline to close to 4x by the end of 2021 from 4.6x in 2019. Once the funding mix is confirmed and more data become available about Telefónica Costa Rica’s contribution to VTR, we will assess whether the deleveraging trend for VTR remains in line with what we had expected before this acquisition.

Telefónica Costa Rica is Costa Rica’s second largest mobile service provider. As of 30 June 2020, the business had 2.3 million subscribers, and its mobile network currently has approximately 90% LTE population coverage.

Cabletica, which LLA acquired in 2018, is a leading fixed-line operator in Costa Rica, offering broadband, Pay TV and fixed telephony services, with about 600,000 homes passed and 430,000 revenue generating units as of March 2020, and revenue of CRC77 billion ($130 million) in 2019.

VTR provides broadband and wireless communications services in Chile and is a wholly owned subsidiary of LLA. As of March 2020, VTR’s network passed 3.72 million homes and served about 2.97 million fixed revenue generating units. The company also served around 304,900 mobile subscribers as a mobile virtual network operator. The company reported revenue of CLP663 billion (around $800 million) for the 12 months to March 2020.

Credit Outlook: 3 August 2020. Pg. 10
Moodys

Countries

ASEAN-5 responses mitigate COVID-19 economic damage but are unlikely to offset rising credit risk

AtlanticIS

Asia, June 25, 2020 – The ASEAN-5 economies – Malaysia (A3 stable), the Philippines (Baa2 stable), Indonesia (Baa2 stable), Vietnam (Ba3 negative) and Thailand (Baa1 stable) – have taken steps to mitigate the economic damage of the coronavirus outbreak. The support packages vary in scale and scope, and are largely contingent in nature. While they will broadly help reduce some of the negative effects of the crisis, they will not offset the rising recessionary or credit risks for most sectors.

  • Policy measures will provide a degree of support, but the confluence of shocks will weigh on growth prospects. The growth slowdown in the region will be significant relative to previous crisis episodes, but will still be moderate compared to other regions. Nonetheless, the ASEAN-5 are negatively impacted by sharp falls in external trade flows, sluggish commodity prices that weigh on the fiscal revenues of commodity exporters, and financial market volatility that can trigger capital outflows.
  • Policy measures will have significant fiscal costs. Government revenue across the region will decline and spending will rise as countries try to mitigate the effects of the crisis. Fiscal costs of support measures will be significant, with debt burdens only stabilising from 2021 for most economies. However, the ASEAN-5 countries had adequate fiscal buffers before the pandemic that gives them fiscal space to respond to the crisis.
  • Credit risks for banks have increased, despite policy support. Policy measures have mostly focused on providing liquidity to banks to support new lending, and through credit restructuring such as debt moratoriums. As moratoriums are lifted, banks’ problem loans will likely increase.
  • Few corporate sectors will benefit directly from government support. Strategically important state-owned enterprises will likely take priority in receiving direct financial support. Privately owned companies will get some support from broader policy measures such as temporary tax relief and lower interest rates.
  • Infrastructure sector will get limited policy support but essentiality of services may help shore up demand for some companies. With the exception of Indonesia, few countries in the region have taken steps to support utilities and other infrastructure companies. Governments have instead shifted some of the burden related to policy support to the utilities and other infrastructure providers.

Credit Outlook: 29 June 2020. Pg. 37
Moodys

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