NEW YORK--(BUSINESS WIRE)--
Fitch Ratings has affirmed Inkia Energy's Ltd (Inkia) foreign and local
currency Issuer Default Ratings (IDRs) at 'BB'. Fitch has also affirmed
its long-term rating for the company's USD450 million senior unsecured
notes due in 2021 at 'BB'. The Rating Outlook was revised to Negative
The Outlook revision to Negative reflects Inkia's decision to repay USD
167 million intercompany loans to its parent Israel Corporation (IC).
These loans were subordinated to outstanding notes. Fitch grants an
equity credit for these loans and considers that a repayment and/or
other transfers to the shareholders have the same effect of a dividend
payment. Additionally, consolidated leverage continued increasing as the
result of the acquisition of AEI Nicaragua. These transactions generated
a credit position weaker than previously anticipated.
Inkia' ratings are supported by the solid credit profile of its most
important subsidiary, Kallpa, a 1063 MW (megawatt) Peruvian
thermoelectric generation company. Kallpa's credit quality is supported
by its contractual position and competitive cost structure; Inkia has a
75% participation in Kallpa. Inkia's ratings also incorporate the
geographic diversification of its assets, large expansion projects, and
expected improvements in its financial profile following the completion
of these projects.
Credit Profile Linked to Kallpa: Kallpa Generacion S.A.'s (Kallpa)
credit quality is supported by its competitive cost structure and
contracted position. Kallpa's power purchase agreements (PPAs) represent
approximately 87% of its firm energy for the period 2014-2021 (excluding
Las Flores plant) and support cash flow stability through fixed payments
and fuel cost pass-through clauses. The company has secured 100% of its
natural gas needs under long-term gas supply contracts through 2022. In
2013, Kallpa's EBITDA represented 60% of Inkia's consolidated EBITDA.
In August 2012, Kallpa completed its expansion project, which increased
the plant's installed capacity to 870 MW from 581 MW and improved its
efficiency through the installation of a 289 MW combined-cycle unit. The
company has recently acquired Las Flores, a 193MW simple-cycle gas power
plant located 3Km from Kallpa's plant. The transaction closed in April
2014 and will add USD108M of new debt. By 2015 and after the acquisition
is completed, leverage at this subsidiary level should range between 2.5
times (x) and 3.0x.
High Leverage driven by growth strategy: Inkia's stand-alone financial
profile has historically been weak for the rating category and leverage
is expected to remain high for the foreseeable future. Between September
2013 and March 2014, consolidated leverage increased from 4.2x to 6.3x
as result of i) debt related to CdA, ii) the acquisition and debt
consolidation of AEI Nicaragua Holdings and iii) a short-term credit
facility provided secured with the shares of Southern Cone Power Ltd and
Latin America Holding. Net leverage, measure as total net debt with
equity credit / EBITDA, was 4.2x at the end of the first quarter of 2014.
In the short to medium term, leverage is expected to weaken as the
company issues between USD750 million and USD800 million of new debt,
mostly to finance its projects Cerro del Aguila (CdA) and Samay I and
the acquisition of Las Flores. Consolidated leverage metrics could then
return to approximately 3.5x to 4.0x, absent additional investments that
can perpetuate the company's high consolidated leverage.
Adequate Liquidity Position: Inkia's ratings reflect the strong
liquidity profile it maintained during its expansion process. Liquidity
was supported on cash on hands, readily monetizable assets and steady
dividends from EDEGEL. As of March 2014, its consolidated cash position
amounted to USD494 million. This compares with short-term debt of USD
411 million, including a USD 168 million intercompany loan. In the short
to medium term, Inkia's liquidity position may change as result of its
divestiture in EDEGEL, investments in projects with credit profiles
different from that of EDEGEL and changes in the dividend policy.
The company benefits from access to local and international capital
markets to finance investment projects at the subsidiary level.
Currently, the company has a syndicated bank facility for USD591 million
to finance the construction of the CdA hydroelectric generation plant
(project finance debt) and is negotiating a facility for up to USD 304
million to finance Samay I. Additionally, Kallpa has incurred in
additional debt up to USD 108 million to finance the acquisition of Las
Debt Structurally Subordinated: Inkia's debt is structurally
subordinated to debt at the operating companies. Total debt at the
subsidiary level amounted to approximately USD1.041 billion, or 70% of
total consolidated adjusted debt at 1Q2014. The bulk of this debt is
represented by notes issued by Kallpa to fund its capacity expansion.
This project finance-like debt has a standard covenants package
including dividend restrictions and limitations on additional
On unconsolidated basis, Inkia's cash flow depends on dividends received
from subsidiaries and associated companies. In YE 2013, the company
received distributions for USD 109 million vs. USD 22 million in 2012.
This significant increase is mainly explained as Kallpa started paying
dividends after completing its expansion project (USD 67 million in
2013). Kallpa's project finance-like debt has a standard covenant
package including dividend restrictions and limitations on additional
indebtedness. Kallpa is restricted from paying dividends if its debt
service coverage ratio (DSCR) falls below 1.2x. Fitch expects Kallpa's
DSCR will be approximately 1.6x in 2014.
In 2013, Inkia received dividends from Southern Cone Power (EDEGEL) for
USD 29 million vs. USD 9 million in 2012. Inkia is entitled to receive
dividends from EDEGEL until the divestiture is completed. Going forward,
the company expects to receive dividends for more than USD 25 million
yearly from its investments in Central America (Nicaragua and El
Salvador subsidiaries would contribute USD 14 million). Fitch considers
that the quality of these proceeds is weaker than that of EDEGEL.
Portfolio of projects with stable cash generation profile: Cerro del
Aguila is a 510MW hydro plant with long-term PPAs for approximately 402
MW starting in 2018. The project is estimated to cost USD910 million and
Inkia expects to fund this project with approximately 65% debt and the
balance with equity. The plant would likely benefit from an existing
reservoirs in the Mantaro river basin; Inkia estimates a capacity factor
over 70% for this plant. Samay I is a 600MW dual-fuel power plant, which
will operate initially as a cold reserve plant. It will receive fixed
capacity payments for 20 years. The plant has the potential to increase
its cash generation when a gas pipeline recently awarded by the Peruvian
government is built. Inkia has approximately a 75% participation in both
projects. Fitch expects a significant improvement in the financial
profile of the issuer after these projects start generating cash flows
Asset Diversification: The ratings also take into consideration the
company's geographic diversification. Excluding its Peruvian operations,
Inkia generated approx. 28% of its consolidated EBITDA (plus dividends)
in 2013 from assets located in Bolivia (rated 'BB-' by Fitch), Chile
('A+'), the Dominican Republic ('B'), El Salvador ('BB-') and Panama
('BBB'). Over the past few years, cash flow from these assets was of
strategic importance for Inkia. After the completion of Kallpa's
expansion, these assets represent smaller portion of cash distributions
to the holding company.
A negative rating action could be triggered by a combination of:
investments in projects with risk profiles different from that of
EDEGEL; deterioration of credit metrics as result of new investments,
dividend payments while leverage is high; failure to decrease
consolidated leverage below 4.0x after Cerro del Aguila and Samay I
commence operations; concentration of assets in countries with high
political and economic risk.
Although a positive rating action is not expected in the near future,
any combination of the following factors could be considered: the
Peruvian operation's cash flow contribution increasing beyond current
expectations and/or leverage declines materially.
Additional information available at 'www.fitchratings.com.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (May 28, 2014);
--'Treatment and Notching of Hybrids in Non-Financial Corporate and REIT
Credit Analysis' (Dec. 23, 2013).
Applicable Criteria and Related Research:
Corporate Rating Methodology - Including Short-Term Ratings and Parent
and Subsidiary Linkage
Treatment and Notching of Hybrids in Non-Financial Corporate and REIT
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Giancarlo Rubio, +1 212-612-7899
Fitch Ratings, Inc.
33 Whitehall Street
York, NY 10004
Lucas Aristizabal, +1
Bormann, CFA, +1 312-368-3349
Elizabeth Fogerty, +1 212-908-0526
Source: Fitch Ratings