Fitch Affirms Capex S.A.'s IDR at 'B-'; Outlook Negative

NEW YORK--()--Fitch Ratings has affirmed the foreign/local currency Issuer Default Rating (IDR) of Capex S.A. (Capex) at 'B-'. In addition, Fitch has affirmed Capex's US$200 million senior unsecured notes due 2018 at 'B-/RR4'. The Rating Outlook is Negative.

KEY RATING DRIVERS

Capex's ratings are constrained by the 'B-' country ceiling of the Republic of Argentina (Local and Foreign currency IDRs of 'B-'/'CC'; Outlook Negative by Fitch). Capex's Negative Outlook is in-line with those assigned to Argentina's sovereign ratings and reflect the high degree of uncertainty about the business climate and economic conditions that should persist throughout 2014.

Capex's ratings are also constrained 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 long-term need to pursue an aggressive capital expenditure plan to sustain the company's vertically integrated business model. Positively, in 2013 Capex has seen slightly constructive regulatory moves by the Argentine government in the gas/electric sectors; however, more significantly positive moves in the form of more aggressive tariff reforms, particularly in the electricity sector, are needed in the future and remain uncertain.

HIGH REGULATORY RISK: Capex's ratings reflect high regulatory risk given heavy government influence in both the electric/utilities and energy sectors. Capex operates in highly strategic sectors where the government both has a role as the price/tariff regulator and also controls subsidies for industry players. In the electricity sector, Capex depends on payments from CAMMESA which can be volatile given this agency depends on the national government for funds to make these payments.

VERTICALLY INTEGRATED THERMOELECTRIC MODEL PROVIDES ADVANTAGE: Capex is an integrated thermoelectric generation company, which was originally formed as an oil exploration and production company (it is currently the 12th largest producer of gas and liquefied petroleum gas in the country). Capex transformed itself into an electricity generation company due to its large discoveries of natural gas in 1991, coupled with the liberalization of Argentina's electricity sector.

The company's vertically integrated business model puts it in an advantageous position versus other Argentine generators. 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 70% 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 reduces the gas supply risk.

RECENT POSITIVE REGULATORY MOVES SHOULD SWING GENERATION TO POSITIVE EBITDA: Government Resolucion 95/13 which was published in February 2013, led to an improved tariff regime for the Argentine generation industry. The level of remuneration for generation nearly doubled for the company. For Capex, the new regulatory regime took effect starting in late May, so generation results should improve in the second half of the fiscal year (based on an April 2014 fiscal year-end). In the April 2013 fiscal year, the company registered EBITDA of US$9 million in the generation segment. Fitch estimates that following the new tariff regime, the company's Fiscal-Year(FY) April 2014 generation results will swing to slightly positive EBITDA.

FINANCIAL RESULTS AND CREDIT METRICS IMPROVING: In large part, due to the new tariff regime the company has seen improving financial metrics. In the latest-12-month (LTM) October 2013 period, Capex registered EBITDA of US$62 million, which is 2% higher than in 2013. EBITDA margins for their part improved by 700 basis points to 47% versus 40% in the April 2013 fiscal year. Free cash flow remains negative since 2010 at US$6 million for the LTM October 2013 period, but slightly better than US$10 million in FY April 2013. Leverage levels have improved with Total Adjusted Debt: EBITDA declined to 4x versus 4.2x and 7.2x respectively in the April 2013 and April 2012 fiscal year periods.

The 'RR4' Recovery Rating for the company's senior unsecured notes outstanding reflects an average expected recovery given default and is in line with the Recovery Rating soft cap established for Argentina.

RATING SENSITIVITY

Capex's credit ratings could be negatively impacted by sustained declines in gas reserves/production or failure to further develop new fields, which could threaten the integrated business model in the long term. In addition, given high dependence on the subsidies by CAMMESA from the Argentine treasury, any further weakening of Argentina's fiscal accounts could have a negative impact on the company's collections/cash flow. Long-term, Fitch expects Capex to maintain a Total Debt:EBITDA ratio of 4x and interest coverage of 2.5x. Conversely, a significant, recurring increase in Capex's debt load which would lead it to register financial metrics above this guidance could negatively impact Capex's credit rating.

A positive rating action is unlikely in the short- to medium- term due to the business environment in Argentina. An upgrade of the Argentine Sovereign could potentially result in a positive rating action. In addition, substantial positive changes in the regulatory environment which would increase the certainty of cash flows could prove favourable to Capex's credit quality.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Corporate Rating Methodology' (Aug. 5, 2013).

Applicable Criteria and Related Research:

Corporate Rating Methodology - Effective from 8 August 2012 - 5 August 2013

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=684460

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=818937

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Contacts

Fitch Ratings
Primary Analyst
Xavier Olave, +1-212-612-7895
Associate Director
One State Street Plaza
New York, NY 10004
or
Secondary Analyst:
Paula Garcia, +562-2-4993316
Director
or
Committee Chairperson:
Daniel Kastholm, +1-312-368-2070
Managing Director
or
Media Relations:
Elizabeth Fogerty, New York, +1 212-908-0526
elizabeth.fogerty@fitchratings.com

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Contacts

Fitch Ratings
Primary Analyst
Xavier Olave, +1-212-612-7895
Associate Director
One State Street Plaza
New York, NY 10004
or
Secondary Analyst:
Paula Garcia, +562-2-4993316
Director
or
Committee Chairperson:
Daniel Kastholm, +1-312-368-2070
Managing Director
or
Media Relations:
Elizabeth Fogerty, New York, +1 212-908-0526
elizabeth.fogerty@fitchratings.com