Fitch Affirms Inkia Energy Ltd's IDR at 'BB'; Rating Outlook Negative

NEW YORK--()--Fitch Ratings has affirmed the local and foreign currency Issuer Default Ratings (IDR) of Inkia Energy Ltd (Inkia) at 'BB' and maintained the Negative Outlook. The rating action includes the affirmation of the company's international bonds outstanding totalling USD450 million due 2023.

Inkia's Negative Outlook reflects Fitch's concerns that the company could distribute significant dividends and other cash payments to its shareholder before its various expansion projects begin generating additional cash flow. This concern was initially sparked by Inkia's decision to repay USD167 million of subordinated intercompany loans to its former parent, Israel Corporation (IC), in 2014, in addition to a USD32 million dividend payment. Fitch grants an equity credit for these loans and considers that a repayment and/or other transfers to the shareholders have the same effect of a dividend payment. Additionally, consolidated leverage continues increasing as the result of the company's pursuit of new investment opportunities.

Inkia's ratings are supported by the solid credit profile of its most important subsidiary, Kallpa, a 1,063-megawatt (MW) Peruvian thermoelectric generation company. Kallpa's credit quality is supported by its contractual position and competitive cost structure; Inkia has a 75% participation in Kallpa. Inkia's ratings also incorporate the geographic diversification of its assets, large expansion projects, and expected improvements in its financial profile following the completion of these projects.

KEY RATING DRIVERS

Credit Profile Linked to Kallpa:

Kallpa Generacion S.A.'s (Kallpa) credit quality is supported by its competitive cost structure and contracted position. Kallpa's power purchase agreements (PPAs) represent most of its firm energy for the period 2014-2021 (excluding the Las Flores plant) and support cash flow stability through fixed payments and fuel cost pass-through clauses. The company has secured 100% of its natural gas needs under long-term gas supply contracts through 2022. In 2014, Kallpa's EBITDA represented 61% of Inkia's consolidated EBITDA.

Historically, Inkia has aggressively sought to increase Kallpa's generation capacity. In August 2012, Kallpa completed an expansion project which increased the plant's installed capacity to 870 MW from 581 MW and improved its efficiency through the installation of a 289 MW combined-cycle unit. In 2014, the company acquired Las Flores, a 193 MW simple-cycle gas power plant located 3Km from Kallpa's plant.

High Leverage Driven by Growth Strategy:

Inkia's stand-alone financial profile has historically been weak for the rating category and leverage is expected to remain high for the foreseeable future. Between September 2013 and March 2015, consolidated LTM leverage increased from 4.2x to 7.4x as result of i) debt related to CdA, ii) the acquisition and debt consolidation of assets in Nicaragua, Jamaica, Colombia, and Guatemala, and iii) debt related to Samay I.

In the short- to medium-term, leverage is expected to weaken as the company issues a further USD200 million in new debt, mostly to finance its projects Cerro del Aguila (CdA) and Samay I and the acquisition of Las Flores. Consolidated leverage metrics could then return to approximately 3.5x to 4.0x, absent additional investments that can perpetuate the company's high consolidated leverage.

Debt Structurally Subordinated:

Inkia's debt is structurally subordinated to debt at the operating companies. Total debt at the subsidiary level amounted to approximately USD1.370 million, or 75% of total consolidated adjusted debt at as of first quarter 2015 (1Q15). The bulk of this debt is represented by notes issued by Kallpa to fund its capacity expansion. This project finance-like debt has a standard covenants package including dividend restrictions and limitations on additional indebtedness.

On an unconsolidated basis, Inkia's cash flow depends on dividends received from subsidiaries and associated companies. In FY2014, the company received distributions of USD124 million, the largest contribution of which comes from Kallpa. Kallpa's project finance-like debt has a standard covenant package including dividend restrictions and limitations on additional indebtedness. Kallpa is restricted from paying dividends if its debt service coverage ratio (DSCR) falls below 1.2x (approximately 1.3x in FY2014).

Portfolio of projects with stable cash generation profile: Cerro del Aguila is a 510 MW hydro plant with long-term PPAs for approximately 402 MW starting in 2016. The project is estimated to cost USD910 million and Inkia expects to fund this project with approximately 65% debt and the balance with equity. The plant would likely benefit from an existing reservoir in the Mantaro river basin; Inkia estimates a capacity factor close to 70% for this plant in the years immediately following commencement of operations. Samay I is a 600 MW dual-fuel power plant, which will operate initially as a cold reserve plant. It will receive fixed capacity payments for 20 years. Inkia has approximately a 75% participation in each projects. Fitch expects a significant improvement in the financial profile of the issuer after these projects start generating cash flows in 2016.

Asset Diversification:

The ratings also take into consideration the company's geographic diversification. Excluding its Peruvian operations, Inkia generated approximately 28% of its consolidated EBITDA (plus dividends) in 2014 from assets located in Bolivia (rated 'BB-' by Fitch), Chile ('A+'), Colombia ('BBB'), the Dominican Republic ('B'), El Salvador ('BB-'), Jamaica ('B-') and Panama ('BBB'). Over the past few years, cash flow from these assets was of strategic importance for Inkia. After the completion of Kallpa's expansion, these assets represent a smaller portion of cash distributions to the holding company.

RATING SENSITIVITIES

Negative Drivers: A negative rating action could be triggered by a combination of: Inkia pursuing additional opportunities in generation without an adequate amount of additional equity; cashflow-negative construction delays and/or consolidated leverage does not decrease below 4.0x after Cerro del Aguila and Samay I commence operations; the company implements a dividend policy while leverage is high; or its asset portfolio becomes more concentrated in countries with high political and economic risk.

Positive Drivers: Although a positive rating action is not expected in the near future, any combination of the following could be considered: the Peruvian operation's cash flow contribution increasing beyond current expectations, and/or leverage declines materially.

LIQUIDITY AND DEBT STRUCTURE

Strong Short-term Liquidity Position:

Inkia's ratings reflect the strong liquidity profile it maintained during its expansion process. Liquidity is supported by cash on hand and readily monetizable assets, such as its recent sale of EDEGEL for net cash inflow of approximately USD360 million. The company's 1Q15 cash position of USD402 million compares with short-term debt of USD144 million. While Fitch views positively the company's cash position relative to short-term debt, we do not net it out of long-term debt in our analysis. Inkia is aggressively pursuing a growth strategy - both organic and inorganic - that obviates any potential long-term benefit from the company's robust liquidity position.

The company benefits from access to local capital markets to finance investment projects at the subsidiary level. Currently, the company has a syndicated bank facility for up to USD591 million to finance the construction of the CdA hydroelectric generation plant (project finance debt) and negotiated a facility for up to USD 311 million to finance Samay I.

KEY ASSUMPTIONS

--More than 100% growth in EBITDA over the next three years as Cerro del Aguila and Samay I commence operations.

--Gross consolidated debt peaking at just over USD2 billion in the next 24 months.

--Leverage decreasing to between 3.5 and 4.0x as new projects improve EBTIDA and debt amortizations gradually shrink total debt. Interest coverage should rise to approximately 3.5x during the same period

FULL LIST OF RATING ACTIONS

Fitch has affirmed the following ratings:

Inkia Energy Ltd.

--Foreign and local currency Issuer Defaul Ratings (IDRs) at 'BB';

--International senior unsecured bond ratings at 'BB'.

--The Rating Outlook is Negative.

Additional information is available on www.fitchratings.com

Related Research:

--'Peruvian Electricity Sector: Demand Growth Driving Investments' (January 2015)

Applicable Criteria

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 28 May 2014)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393

Related Research

Peruvian Electricity Sector

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=811748

Additional Disclosures

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https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=986506

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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
Alyssa Castelli, +1 212-908-0540
alyssa.castelli@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
Alyssa Castelli, +1 212-908-0540
alyssa.castelli@fitchratings.com