Fitch Affirms AES El Salvador Trust II's IDRs at 'BB'; Outlook Negative

NEW YORK--()--Fitch Ratings has affirmed AES El Salvador Trust II's foreign and local currency Issuer Default Ratings (IDRs) at 'BB'. The rating action applies to the company's USD310 million senior unsecured notes due 2023. The Rating Outlook is Negative. Concurrently, Fitch affirmed Compania de Alumbrado Electrico de San Salvador, SA de C.V. y Subsidiarias (CAESS) and Empresa Electrica de Oriente, SA de C.V. y Subsidiarias (EEO) at 'A+(slv)'.

AES El Salvador Trust II (AES El Salvador) is a special-purpose vehicle (SPV) located in Panama that was created to issue USD310 million of notes on behalf of AES El Salvador Group. AES El Salvador's ratings are based on the combined credit strength of the operating companies that guarantee its debt and reflect the group's strong market position, low business risk profile, and its predictable cash flow generation. The ratings also reflect the exposure to high regulatory risk and to sovereign risk through subsidies. A significant portion of AES El Salvador's cash flow generation comes from government subsidies, which exposes the company to El Salvador's creditworthiness and payment ability. The Negative Outlook reflects the Negative Outlook on El Salvador's 'BB-' sovereign rating.

KEY RATING DRIVERS

LARGE MARKET POSITION AND LOW BUSINESS RISK

AES El Salvador's low business risk results from its stable customer base and predictable cash flows. Although distribution service territories are not exclusive and distributors are free to compete for customers, the risk of new competition is low 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. The ratings factor in the strong market position of AES El Salvador as the largest electric distribution group in the country. The group serves approximately 1.3 million customers and covers 80% of El Salvador's electricity distribution area. The group supplied 63% of the total energy demand in the country during 2013 (66% in 2012). The company's operations are considered efficient compared with other distribution companies in the region. In 2013, non-technical losses reduced to 1.73% from 2.04% in 2012. This bodes well for the company's credit quality as it limits its exposure to costs that are not completely recognized through the tariffs.

HIGH EXPOSURE TO GOVERNMENT INTERVENTION

The ratings incorporate AES El Salvador's high exposure to regulatory risk and receipt of government subsidies. The Salvadorian government currently subsidizes residential users with a monthly consumption of 99 kilowatt hours (kWh) or less. Additionally, the government implemented an extraordinary subsidy for users with consumption below 200 kWh. The permanence or modification of this extraordinary subsidy is reviewed quarterly by the government. The state owned utility company, Comision Ejecutiva Hidroelectrica del Rio Lempa - (CEL), partly finances these subsidies. In 2013, subsidies received by AES El Salvador totaled USD 136.9 million, representing approximately 16% of its consolidated revenues (USD135.2 million and 17%, respectively in 2012). Approximately 87% of the company's residential customers received subsidies in the last year. Although the government has been paying subsidies in a timely manner, payment delays or a significant extension of the collection period may impact AES El Salvador's financial profile and pressure the ratings.

STRENGTHENING CREDIT FUNDAMENTALS SUPPORTED BY TARIFF STRUCTURE

The company's credit profile is supported by its stable and predictable cash flow generation and strengthening credit metrics as result of higher EBITDA levels as outcome of the tariff reset for the 2013-2017 period. The tariff reset was determined as per the new methodology that considers real costs of the companies based on El Salvador distribution grid instead of an optimized company model as it was considered in the past methodology. Fitch considers that although the new methodology is positive for the issuer, it continues to be exposed to government intervention. In 2013, the issuer recorded consolidated EBITDA and EBITDA margin of USD86 million and 10%, respectively (vs. USD 69.7 million and 8.2% in 2012). Leverage, measure as total debt / EBITDA, reduced to 3.5x in December 2013 from 4.5x in December 2012. Fitch expects the company will be able to maintain a similar leverage ratio in the next years, absent of new debt or changes in the operating environment.

ADEQUATE LIQUIDITY

AES El Salvador's liquidity is supported by its cash on hand, which as of year-end 2013 was approximately USD32.7 million, and USD32.7 million short-term bank credit facilities to buy electricity from generators. Liquidity could be affected in case of higher energy prices for final users that could lead to higher ageing account receivables. Should distribution companies be forced to issue additional debt to fund their working capital requirements, while they continue distributing dividends, their credit quality could deteriorate.

RATINGS SENSITIVITY

--AES El Salvador's ratings could be negatively affected by any combination of the following factors: further sovereign downgrades; weakening of credit metrics; deterioration of the operating environment resulting from shortages of electricity supply or further political or regulatory intervention that negatively affects the company's financial performance;

--AES El Salvador's ratings could be positively affected by a sustainable leverage reduction; regulatory stability; and improving macroeconomic conditions in El Salvador.

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: Including Short-Term Ratings and Parent and Subsidiary Linkage

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=715139

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=823511

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

Contacts

Fitch Ratings
Primary Analyst AES El Salvador Trust II
Giancarlo Rubio
Associate Director
+1-212-612-7899
Fitch Ratings, Inc.
One State Street Plaza,
New York, NY 10004
or
Secondary Analyst
Vanessa Villalobos
Associate Director
+506-2296-94-54
or
Primary Analyst CAESS/EEO
Allan Lewis
Associate Director
+506-2296-94-54
or
Secondary Analyst
Vanessa Villalobos
Associate Director
+506-2296-94-54
or
Committee Chairperson
Lucas Aristizabal
Senior Director
+1-312-368-3260
or
Media Relations:
Elizabeth Fogerty, New York, +1-212-908-0526
elizabeth.fogerty@fitchratings.com

Sharing

Contacts

Fitch Ratings
Primary Analyst AES El Salvador Trust II
Giancarlo Rubio
Associate Director
+1-212-612-7899
Fitch Ratings, Inc.
One State Street Plaza,
New York, NY 10004
or
Secondary Analyst
Vanessa Villalobos
Associate Director
+506-2296-94-54
or
Primary Analyst CAESS/EEO
Allan Lewis
Associate Director
+506-2296-94-54
or
Secondary Analyst
Vanessa Villalobos
Associate Director
+506-2296-94-54
or
Committee Chairperson
Lucas Aristizabal
Senior Director
+1-312-368-3260
or
Media Relations:
Elizabeth Fogerty, New York, +1-212-908-0526
elizabeth.fogerty@fitchratings.com