CHICAGO - (Business Wire) Fitch Ratings has downgraded AES El Salvador Trust's foreign and local currency Issuer Default Ratings (IDRs) to 'BB+' from 'BBB-'. The rating action applies to the US$300 million 6.75% Political Risk Protected (PRP) bond issuance due Feb. 1, 2016. Concurrently, Fitch has downgraded the bond issuance's national scale rating to 'AA(slv)' from 'AAA(slv)'. The Rating Outlook is Negative.
The rating action reflects the company's increased exposure to political interference and regulatory uncertainty in the El Salvadorian electricity sector, as well as the recently implemented tariff reduction, which has increased leverage and business risk. Price controls recently put in place by the government to curb electricity price increases to end-users due to rising fuel cost has resulted in large government subsidies to the sector and increased dependency on the government. In addition, the growing difference between currently controlled prices and the higher actual cost of electricity holds the potential to create large market imbalances and make adequate rate increases in the future more difficult to accomplish should government subsidies be reduced or eliminated following presidential elections next year. Positively, the government has transferred subsidies to distribution companies in a timely manner.
The rating action also reflects the recently implemented tariff decrease for the period April 1, 2008 to Dec. 31, 2012, which significantly lowers the company's revenue and cash flow generation. In April 2008, a portion of the December 2007 tariff reduction was reversed by regulators and AES El Salvador agreed to withdraw its tariff review appeal with the Supreme Court. The revised tariff reduction will decrease the company's cash flow generation by approximately 15% to 20%, increasing leverage, as measured by total debt-to-EBITDA from the 3.5 times (x) reported at year-end 2007 to more than approximately 4x, which is not consistent within the investment grade category. The company has implemented an aggressive cost reduction plan that should help offset some of the effects of the lower tariff. AES El Salvador has established a program aimed to maximize utilization of the company's own resources in order to reduce outsourcing costs.
At the beginning of 2008, El Salvadorian president, Antonio Saca, announced that electricity tariffs for consumers will remain unchanged for the remainder of his term in office, which ends May 2009. The deficit created by the difference between the true cost of electricity and the price charged to end users is being subsidized, and will continue to be subsidized through the government-owned hydroelectric generation company. Subsidies for AES El Salvador are estimated to be US$100 million in addition to the existing US$42 million from the Subsidized Residential Tariff for users with consumption below 99kwh (kilowatt hours).
Overall subsidies from government are expected to be approximately 30% of revenue or the equivalent of twice the company's expected EBITDA generation. Tariffs for end users have remained unchanged since June 2006. By May 2009, El Salvador could have difficulties increasing the tariff for end users to match the true cost of electricity, which is expected to remain high if not increase further should demand for electricity continue to rise, high hydrocarbon prices prevail, and no significant new generation added in the country.
AES El Salvador Trust's IDRs and issue ratings are based on the combined credit strength of AES El Salvador's operating assets. AES El Salvador is composed of four distribution companies in El Salvador: Compania de Alumbrado Electrico de San Salvador, S.A. de C.V. (CAESS), AES CLESA, Empresa Electrica del Oriente, S.A. de C.V. (EEO), and Distribuidora Electrica de Usulutan S.E.M. (DEUSEM). These operating companies are the guarantors of AES El Salvador's outstanding debt issuance. The company's PRP notes benefit from external liquidity facilities totaling 12 months of interest payments. A six-month debt-service reserve account, coupled with a six-month letter of credit (LOC) provided by Credit Suisse (acting through its Cayman Islands branch), helps protect against a potential currency inconvertibility/non-transfer event. The facilities will remain available for the life of the notes as long as certain criteria are met. While the stated maturity of the notes is 2016, the notes can be extended by 12 months during an event of transfer and convertibility restrictions.
AES El Salvador operates essentially as a natural monopoly. Its low-risk business gives the company a stable customer base and a predictable cash flow. Although distribution service territories are not exclusive, and distributors are free to compete for customers under the rules established by the Electricity Law, the risk of new competition is minimal given that distribution companies possess significant economies of scale that make it inefficient for more than one company to operate in any particular geographic area. AES El Salvador's operations are relatively efficient compared with other distribution companies in the region. The group, on a consolidated basis, has reported losses of 9% for the third quarter of 2007, which compares favorable with other companies in the region. The group has improved efficiency in terms of customers per employee by increasing the number of customers per employee to more than 1,000 in 2007 from 639 in 1999.
AES El Salvador is the largest electric distributor utility group in El Salvador, with a market share of 78.6%, reaching a total of approximately 1 million customers. AES El Salvador Trust is a special-purpose vehicle (SPV) located in Panama and will be the debtor of the proposed issuance on behalf of AES El Salvador.
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Fitch Ratings
Lucas Aristizabal, +1-312-368-3260 (Chicago)
Marcelle Millet, +506-296-9182 (San Jose)
Christopher Kimble, +1-12-908-0226
(Media Relations, New York)
