BUENOS AIRES, Argentina--()--Fitch Ratings has affirmed the following ratings of Capex S.A. (Capex):
-- Foreign currency Issuer Default Rating (FC IDR) at 'B-', Outlook Negative;
-- Local currency (LC) IDR at 'B-', Outlook Negative;
-- USD200 million senior unsecured notes due 2018 at 'B-/RR4';
-- National scale ratings at 'A(arg)', Outlook Stable;
-- National scale senior unsecured notes at 'A(arg)'.
The 'B-' ratings of Capex S.A. are constrained by the 'B-' country ceiling of Argentina. The Negative Rating Outlooks that have been assigned to the FC and LC IDRs are in line with ones assigned to Argentina's sovereign ratings and reflect the high degree of uncertainty about the business climate and economic conditions that should persist throughout 2013.
The ratings are also restricted by the high regulatory risks associated with operating in the electricity sector in Argentina, exposure to devaluation risk (currency mismatch between peso-denominated cash flows and dollar-denominated debt), and the need to pursue an aggressive capital expenditure plan in the long term to sustain the company's vertically integrated business model.
Capex is an integrated thermoelectric generating company. Originally formed as an oil exploration and production company, Capex was transformed into an electric generation company due to its large discoveries of natural gas in 1991, coupled with the liberalization of Argentina's electricity sector. Capex is amongst the 12 largest producers of gas and liquefied petroleum gas (LPG) in Argentina's oil & gas sector. As of fiscal year ended (FYE) April 30, 2012, 64.1% of Capex's sales were derived from electric sales and 35.9% from oil and other liquids sales. In the last fiscal year, gross energy generation was 3,270 GWh (gigawatt hours), a decline of 14.9% compared to the year before due to a one-time external event that affected the combined cycle generation for four months.
Capex benefits from operating efficiencies as an integrated thermoelectric generating company in Argentina and the flexibility from having its own natural gas reserves, as approximately 80% of gas needs at the electric plant being self-supplied. This gives the company an advantage against other players in the industry, especially given existing gas restrictions in the country. Capex's generating units are efficient, and the proximity to its natural gas reserves in the Agua del Cajon field coupled with gas transportation restrictions from Neuquen basin to the main consumption area in Buenos Aires reduce the gas supply risk.
Regulatory risk is high. Electricity and gas prices remain sub-optimal compared with other countries in the region; this has discouraged investments in both sectors. Capital investments for maintenance in the power generation industry depend on discretional approvals by the regulatory authority. In addition, the cost of power generation has increased significantly due to natural gas restrictions and reliance on more expensive fuels, while electric tariffs have been frozen (especially to the residential market). Such deficit between electricity tariffs and industry costs is funded through subsidies, which depend on public funding.
Capex's cash flow generation is volatile; power generation is, among other things, subject to regulatory issues and weather conditions. Operating cash flow generation is concentrated in Argentina. During the first six months of FYE April 30, 2013, as of Oct. 31, 2012, Capex generated USD23 million in funds from operations (FFO) and funded USD25.8 million of capital expenditures. Capex has some flexibility to manage capital expenditures in the short term. Yet, in the long run investments are vital to secure the company's vertically integrated model. Proven gas reserves cover approximately six to eight years of the electric plant's needs (depending on the percentage bought in the market and the power generation).
Fitch believes Capex's leverage needs to remain moderate to mitigate regulatory risks. At Oct. 31, 2012, Capex had a total debt-to-EBITDA ratio of 3.9x and EBITDA-to-interest of 2.1x. As of Oct.31, 2012, the company had USD7.5 million of short-term cash and marketable securities and USD43 million in long term debt. These figures compared to USD26.7 million of short-term debt. During 2011, Capex issued USD200 million of notes maturing in 2018. These notes account for the majority of the company's USD243.9 million of total debt at the end of October.
The Stable Outlook reflects Fitch's expectations that Capex will manage its balance sheet to a targeted debt-to-EBITDA ratio of around 3.0x. Under a conservative scenario, Fitch estimates the company's interest coverage to be around 2.5x.
Any significant increase in Capex's targeted leverage ratio would threaten credit quality and could result in a negative rating action. Also, ratings could be negatively affected by a sustained decline in gas reserves and production or failure to further develop new fields, threatening the integrated business model in the long term. In addition, ratings could be affected by a significant and sustained change in the regulatory environment.
Additional information is available 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 08, 2012);
--'Liquidity Considerations for Corporate Issues' (June 12, 2007);
--'Recovery Ratings and Notching Criteria for Nonfinancial Corporate Issuers' (Nov. 24, 2009).
Applicable Criteria and Related Research:
Corporate Rating Methodology
Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers
Liquidity Considerations for Corporate Issuers