Fitch Affirms CTM's IDRs at 'BBB-'; Outlook Stable

NEW YORK--()--Fitch Ratings has affirmed the foreign- and local-currency Issuer Default Ratings (IDRs) for Consorcio Transmantaro S.A. (CTM) at 'BBB-'. Fitch has also affirmed the 'BBB-' rating of outstanding USD450 million senior unsecured notes due 2023.

The Rating Outlook is Stable.

CTM's ratings reflect the company's stable and predictable cash flow generation, improving financial profile and moderate to low regulatory risk. The ratings also consider implicit support from CTM's shareholders, which at times have supported the company through subordinated intercompany loans and direct support for project developments.

KEY RATING DRIVERS

Stable and Predictable Cash Flow Generation

CTM's ratings reflect the company's stable and predictable cash flow generation, characteristic of electricity transmission companies, derived from its fixed revenues and stable costs. The company operates nine transmission lines under different concession agreements, BOOT contracts, granted by the Peruvian government; these concessions have a remaining life between 18 and 30 years. CTM generates revenues from granting access for electric generation and distribution companies to its transmission lines at rates set during the initial bidding process for the concession and annually adjusted by U.S. PPI. CTM is not exposed to volume risk as its revenues are not dependent on the amount of electricity transported but the availability of its transmission lines.

Leverage Driven by CAPEX Program

In 2013, CTM's credit metrics improved significantly as the Zapallal-Trujillo transmission line started operations in December 2012, generating annual revenues of USD25.1 million. Leverage, measured as total debt to EBITDA, reduced to 5.8x in 2013 from 9.7x in 2012. EBITDA increased to USD88.1 million from USD47.3 million in the same period. EBITDA was also positively affected by non-recurrent revenues for approximately USD19.6 million related to modifications in Mantaro-Socabaya BOOT contract. By year-end 2017 and following the completion of the existing portfolio of projects, CTM adjusted EBITDA should range between USD145 and USD155 million and consolidated leverage should approximate 6.0x.

Currently, CTM has concession contracts to develop three new transmission lines that are expected to require approximately USD536 million of additional investments between 2014 and 2016; projected CAPEX will be concentrated on two projects: Machupicchu-Cotaruse and Mantaro-Montalvo (USD79.3 million and USD427 million, respectively). The company expects to finance these transmission lines using project finance vehicles, management trusts, with a capital structure of 70% debt and 30% equity funded with proceeds from internal cash flow generation. During the construction period, consolidated leverage could exceed 7.0x depending on the capital structure of the projects, cost overruns and contingencies. Excluding expected revenues and non-recourse debt associated with new projects, leverage would range between 5.4 and 5.9x. This range is in line with the assigned rating category.

Moderate to Low Regulatory Risk

A portion of CTM's revenues are subject to annual regulatory review, which exposes the company's revenues to potential changes to regulated tariffs. Company's main concession, Mantaro-Socabaya transmission line, was granted under a regulatory scheme that allows the Peruvian government to adjust downward the rate of return used to calculate the tariffs of this concession. This risk is low to moderate given the track record of the regulator, the currently low interest rate environment, which is somewhat offset by the improving sovereign backdrop in Peru (lowers the sovereign risk premium), and the small proportion of cost transmission represents in total electricity cost passed on to the final consumer.

The Mantaro-Socabaya transmission line accounted for approximately 56% of company's transmission revenues in 2013 (72% in 2012); the remaining 44% of revenues was derived from concessions under the new regulatory scheme and bilateral contracts for complementary transmission lines. The new scheme establishes a fixed annual return on the investment for the life of the concession; the rate is set during the bidding process. CTM's revenues from new concessions would increase as a percentage of total revenues overtime.

CTM Strategic Importance for the Country

CTM's main transmission concession is the Mantaro-Socabaya line, which created the national interconnected system (SEIN), services almost all of the country's population. CTM has an approximately 27% market share based on revenues and, together with its sisters companies REP and ISA Peru, accounted for approximately 75% of the transmission market in Peru in 2012. Future expansions for the group are expected to be developed by CTM.

Positive Shareholders Support

CTM is owned 60% by Interconexion Electrica S.A. E.S.P. (ISA; rated 'BBB'; Outlook Stable) and 40% by Empresa de Energia de Bogota (EEB; rated 'BBB-', Outlook Stable). CTM's shareholders have historically supported the company through equity injections, subordinated intercompany loans and explicit equity injection pledges for some of the company's electric transmission construction projects. The company also benefits from its relationship with its sister company, REP, with which it shares its management team. Going forward, Fitch expects lower cash injections from CTM's shareholders. CTM's ratings also incorporate the expectation of low to none dividend payments in the short to medium term and while the company is developing its investment plans. Going forward, the company's dividends policy will depend on cash availability and on maintaining an adequate financial profile.

RATING SENSITIVITIES

Although a negative rating action is not expected in the short term, failure to maintain consolidated leverage close to 6.0x over the medium term could result in a negative rating action or outlook. This could occur if the company increases the proportion of debt used to finance expansion projects or it lowers the expected return on new expansion projects in order to win more concessions.

A positive rating action could occur if the company lowers its leverage level below 5.0x on a sustained basis.

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 12 August 2011 to 8 August 2012

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=647229

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=827345

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Contacts

Fitch Ratings
Primary Analyst
Giancarlo Rubio, +1-212-612-7899
Associate Director
Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10004
or
Secondary Analyst
Lucas Aristizabal, +1-312-368-3260
Senior Director
or
Committee Chairperson
Dan Kastholm, +1-312-368-2070
Managing Director
or
Media Relations
Elizabeth Fogerty, +1-212-908-0526 (New York)
elizabeth.fogerty@fitchratings.com

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Contacts

Fitch Ratings
Primary Analyst
Giancarlo Rubio, +1-212-612-7899
Associate Director
Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10004
or
Secondary Analyst
Lucas Aristizabal, +1-312-368-3260
Senior Director
or
Committee Chairperson
Dan Kastholm, +1-312-368-2070
Managing Director
or
Media Relations
Elizabeth Fogerty, +1-212-908-0526 (New York)
elizabeth.fogerty@fitchratings.com