Fitch Ratings has upgraded Transelec S.A.'s (Transelec) foreign and local currency Issuer Default Ratings (IDRs) to 'BBB' from 'BBB-'. Fitch has also upgraded Transelec's long-term national scale rating to 'AA-(cl)' from 'A+(cl)'. These ratings actions cover the company's international and domestic bonds outstanding, which total approximately USD675 million and the equivalent of USD1.4 billion respectively. The Rating Outlook is Stable.
A complete list of ratings follows at the end of this press release.
KEY RATING DRIVERS
The ratings upgrade is largely driven by the company's low business risk profile reflected in increasingly predictable and sound cash flow generation, combined with a solid balance sheet and a broad financial flexibility following recent refinancing efforts. The company's financial results for 2014 have come above Fitch's expectations, and Fitch's forecast has been adjusted to reflect the increasing predictability of free cash flow (FCF) generation.
Transelec's liquidity profile has also notably improved via refinancing efforts during 2013-2014, which have helped the company achieve a comfortable debt maturity profile going forward. The ratings increase also reflects the company's relatively lower sector risk, versus other regional transmission companies, as Transelec owns its transmission assets versus operating under concession agreements typically seen in the region.
Transelec's ratings also reflect the implicit shareholder support from the company's shareowners (Brookfield Asset Management Inc. [IDR 'BBB', Outlook Stable]; CPP Investment Board; British Columbia Investment Management Corporation; and PSP Investment). Furthermore, though privately owned, the company's ratings also incorporate the strategic importance of Transelec to the Republic of Chile (IDR 'A+'). Transelec is the owner of over 85% of the country's main energy transmission system, and its operational and financial strength reflect the country's robust regulatory framework, which has remained stable over time.
The main ratings constraints are related to the company's relatively high leverage level as compared to peers in the rating category. Transelec has limited headroom for any meaningful increase in debt, as the company is targeting maintaining long-term maximum debt to EBITDA ratios in the 6.0x-6.5x range. Offsetting this factor, the company possesses highly stable cash flow generation, a comfortable maturity schedule, and implicit shareholder support from strong credit profile shareowners.
Low Business Risk Profile: Transelec's ratings reflect its low business risk profile stemming from its exceptionally stable and predictable cash flow generation, characteristic of electric transmission utility companies and its natural monopoly condition. The regulatory environment in Chile is considered solid and stable, and provides for certainty in the determination of regulated transmission revenues and returns on future investments. Tariff resets for 2015 was rescheduled to 2016 due to large delays in the studies. Going forward and based on the historic results of last tariff setting processes, Fitch does not expect tariff reset to have a material impact on the company's revenues.
Sound Operating Performance: Transelec's financial results for 2014 have come above Fitch's expectations, and Fitch's forecast has been adjusted to reflect the increasing predictability of FCF generation. EBITDA has increased over the past years mainly as a result of the organic expansion of the transmission facilities. In 2014, inflation was higher than expected and had a positive impact in incomes as compared to costs, improving overall margins. EBITDA reached USD370 million as of the latest 12 months (LTM) September 2014, with historic high margin of 83%.
Improved Maturity Profile Enhances Financial Flexibility: Transelec will show a greater financial flexibility going forward as there are no significant debt maturities in the upcoming years. Following the issuance of a USD375 million international bond in July 2014, Transelec refinanced most of its 2014 and 2015 debt maturities, extending its average debt duration. Next financial debt maturity is in 2016, for approximately USD230 million (Series C of local bond amounting to UF6 million). There are no other significant debt maturities between 2017 and 2023. Transelec's total financial debt as of September 2014 amounted to USD2.1 billion, almost completely composed by public notes, both local and international.
Liquidity Remains Sound: As of September 2014, the company's liquidity stood solid with cash on hand of USD210 million covering more than 4x short-term debt. Of such cash balance, close to USD100 million has been used to repay Local Bond 598 Series L in December 2014. By year-end (YE) 2014, cash on hand is projected around USD100 million.
Transelec's liquidity is additionally supported by its proven access to both domestic and international capital and financial markets, being the largest individual local bond issuer in Chile. Finally, the company's liquidity is complemented by a USD250 million committed revolver credit line maturing in September 2017.
High Capex and Dividend Payouts Favor High Leverage to Continue: Transelec's leverage is considered high for its rating category. Leverage is largely driven by the company's capex program of close to USD200 million per year and a dividend policy of distributing 100% of net profits. Fitch incorporates in Transelec's analysis scenarios of extraordinary dividend payments, assuming that based on the company's solid cash generation capacity, it should be able to maintain adequate levels of indebtedness, profitability and liquidity.
Leverage measured as debt to EBITDA stood at 6.4x as of Septembert 2014 (LTM), although it is expected to decrease to 6.0x by YE 2014 due to the prepayment of local bonds during the last quarter of the year. However, Fitch does not expect a significant deleverage going forward as the company's financial strategy is aimed at maintaining a leverage level measured as debt to EBITDA in-between 6.0x and 6.5x in the long term.
RATING SENSITIVITIES
Future developments that may, individually or collectively, lead to a negative rating action include: a negative change to Chile's regulatory framework; a change in the company's strategy that becomes more aggressive in terms of leverage, dividends, and capital expenditures; sustained leverage ratios above 6.5x total debt to EBITDA levels; or movements beyond the expected debt levels, liquidity, and operational earnings.
Although unlikely in the near term given the company's capital structure profile, a positive rating action could be considered if the company decreases its leverage strategy. In particular, leverage levels of 4.5x or below would be seen positively.
Fitch has upgraded the following ratings:
-- Foreign currency IDR to 'BBB' from 'BBB-';
-- Local currency IDR to 'BBB' from 'BBB-';
-- Senior unsecured international bonds to 'BBB' from 'BBB-';
-- National scale rating to 'AA-(cl)' from 'A+(cl)';
-- Local bond program No.480 and Series C, to 'AA-(cl)' from 'A+(cl)';
-- Local bond program No.481 and Series D, to 'AA-(cl)' from 'A+(cl)';
-- Local bond program No.598, to 'AA-(cl)' from 'A+(cl)';
-- Local bond program No.599 and Series H, K, M and N, to 'AA-(cl)' from 'A+(cl)';
-- Local bond program No.743 and Series R and U, to 'AA-(cl)' from 'A+(cl)';
-- Local bond program No.744 and Series Q, S and T, to 'AA-(cl)' from 'A+(cl)'.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (May 28, 2014).
Applicable Criteria and Related Research:
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=978972
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