Fitch Affirms Consorcio Transmantaro S.A.'s IDR at 'BBB-'; Rating Outlook Stable

NEW YORK--()--Fitch Ratings has affirmed the local and foreign currency Issuer Default Ratings (IDR) of Consorcio Transmantaro S.A. (CTM) at 'BBB-'. The rating action includes the affirmation of the company's international bonds outstanding totaling USD450 million due 2023.

The rating outlook is Stable.

KEY RATING DRIVERS

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 the implicit support from CTM's shareholders, Interconexion Electrica S.A. E.S.P. (ISA; rated 'BBB', Outlook Stable) and Empresa de Energia de Bogota S.A. E.S.P. (EEB; rated 'BBB', Outlook Stable), which at times have supported the company through subordinated intercompany loans and direct support for project developments. Fitch expects the company's shareholders to continue providing support to CTM as it engages in an ambitious expansion program.

Stable and Predictable Cash Flow Generation:

CTM's ratings reflect the company's stable and predictable cash flow generation, characteristic of electric transmission companies, derived from its fixed revenues and stable cost base. The company operates seven transmission lines under different concession agreements, BOOT contracts, granted by the Peruvian government; these concessions have a remaining life between 15 and 30 years. CTM generates revenues from granting access for electric generation and distribution companies to its transmission lines at fixed 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:

The 2014 fiscal year was the first of three years in which CTM will be investing heavily in the construction of four new transmission lines and one substation, which will spur an increase in leverage. Fitch expects that gross leverage, defined as total debt-to-EBITDA, will rise to above 7x at its peak. In 2014, the company generated EBITDA of USD86.4 million on USD191.3 million of reported revenues, for an EBITDA margin of 45.2%. The adjusted EBITDA margin, which excludes passthrough construction revenues, was 79%. Gross debt totaled USD545 million as of December 2014, representing an increase of USD41 million and a gross leverage level of 6.3x versus 5.7x in 2013. By year-end 2017 and following the completion of the existing portfolio of projects, CTM's adjusted EBITDA should range between USD140 and USD150 million and Fitch expects leverage to fall below 6.0x, absent any further significant capex-related debt increases.

Currently, CTM has concession contracts to develop four new transmission lines that are expected to require approximately USD535 million of additional investments over the next three years. Current Fitch forecasts assume that these projects will be financed 10% by equity, with the remaining 90% split roughly evenly between additional debt and internal cash flow. The debt financing has an amortization schedule beginning in 2018 and ending in 2026.

Moderate to Low Regulatory Risk:

A portion of CTM's revenues are subject to annual regulatory reviews, which exposes the company's revenue base to potential changes to regulated tariffs. The 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 considered low to moderate given the track record of the regulator, and the currently low interest rate environment, which is somewhat offset by the improving sovereign backdrop in Peru (lowers the sovereign risk premium). Another important factor mitigating this risk is that transmission costs represent a small proportion of the total electricity cost passed on to the final consumers.

The Mantaro-Socabaya transmission line accounted for 45% of company's transmission revenues in 2014, with the remaining 55% of revenues 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, and the rate is set during the bidding process. Fitch expects that as additional transmission lines under the new scheme become operational over the next three years - particularly the 920km Mantaro-Marcona-Socabaya-Montalvo line - Mantaro-Socabaya's revenue contribution should shrink to around a quarter of total revenues.

CTM Strategic Importance for the Country:

CTM's main transmission concession is the Mantaro-Socabaya line, which created the national interconnected system (SEIN), which services almost all of the country's population. CTM has an approximately 33% market share based on revenues and, together with its sister company Red de Energia del Peru S.A. (REP), also owned by ISA and EEB, the two companies accounts for approximately 75% of the transmission market in Peru. Future expansions for the group are expected to be developed by CTM.

Positive Shareholder Support:

CTM's credit profile is supported by being owned by leading Latin American energy companies ISA (60% share ownership) and EEB (40% share ownership). CTM's shareholders, both rated 'BBB' with a Stable Outlook by Fitch, have solid investment grade credit profiles and 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 would expect continued support from its shareholders in case of adverse conditions. In the near term, CTM's shareholders are expected to continue to commit equity towards the company's future projects, and to forgo dividends during the expansion period.

RATING SENSITIVITIES

Although a negative rating action is not expected in the short term, failure to lower leverage below 7.0x over the next three years 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, if it lowers the expected return on new expansion projects in order to win more concessions, or if its current expansion plans experience significant construction delays. In addition, a general deterioration in the credit quality of the current counterparties could also negatively impact CTM's ratings.

A positive rating action is unlikely in the short- to medium-term given the company's expansion program and high leverage. Long-term, a positive rating action could occur if the company lowers its leverage level below 6.0x on a sustained basis, while maintaining a strong stable of high-quality, diversified clients.

KEY ASSUMPTIONS

Fitch's key assumptions within the rating case for the issuer include:

--USD535 million of CAPEX between 2015 and 2017, partially funded by USD250 million loan

--EBITDA steadily growing as the projects come on line, reaching the USD145 million/year level by 2018

--Positive FCF generation after peak capex in 2016

--Dividend payout rate of approximately 60% of net income starting in 2017

--Leverage peaking at over 7.0x in the next two years, before falling to below 6.0x as expansions come online and EBITDA generation grows

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

Applicable Criteria and Related Research:

--'Corporate Rating Methodology' (May 28, 2014);

--'Latin American Power and Utilities: Rating Navigator Companion' (March 11, 2015).

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=749393

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=983253

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Contacts

Fitch Ratings
Primary Analyst
John Wiske
Analyst
+1 212-908-9195
Fitch Ratings, Inc.
33 Whitehall St
New York, NY 10004
or
Secondary Analyst
Lucas Aristizabal
Senior Director
+1 312-368-3260
or
Committee Chairperson
Daniel Kastholm
Managing Director
+1 312-368-2070
or
Media Relations:
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
John Wiske
Analyst
+1 212-908-9195
Fitch Ratings, Inc.
33 Whitehall St
New York, NY 10004
or
Secondary Analyst
Lucas Aristizabal
Senior Director
+1 312-368-3260
or
Committee Chairperson
Daniel Kastholm
Managing Director
+1 312-368-2070
or
Media Relations:
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com