Fitch Affirms Enersis Americas S.A.'s IDRs at 'BBB'; Outlook Stable

CHICAGO--()--Fitch Ratings has affirmed Enersis Americas S.A.'s Long-Term Foreign and Local currency Issuer Default Ratings (IDRs) at 'BBB', and long-term national scale rating at 'AA-(cl)'. The Rating Outlook is Stable. A complete list of rating actions follows at the end of this press release.

KEY RATING DRIVERS

The ratings affirmation follows the company's recent announcement to proceed with a public acquisition of shares ("OPA" by its Spanish acronym) for all shares issued by Endesa Americas S.A. The OPA expires on October 28. This is one of the last steps of the company's reorganization process that started last year and it is expected that the merger will be effective during 2016. The ratings incorporate the assumption that Enersis Americas S.A.'s organizational structure will be simplified by merging the intermediary entities Endesa Americas S.A. and Chilectra Americas S.A. After the transaction has been completed, Endesa Americas' and Chilectra Americas' shares will be exchanged for Enersis Americas' shares.

The operation will be funded with a combination of cash on hand, and incremental debt. Shareholders will have 30 days to exercise their withdrawal rights after Enersis Americas, Endesa Americas and Chilectra Americas approve the merger during their respective extraordinary shareholder meetings. Today, each of the entities approved the merger. Enersis Americas', Endesa Americas' and Chilectra Americas' shareholders' deadline to exercise their withdrawal rights is Oct. 28, 2016.

If shareholders exercising the withdrawal rights for Enersis Americas, Endesa Americas and Chilectra Americas exceed 10.0%, 10.0% and 0.91% respectively, the merger will not be formalized and the company may call for another shareholders meeting to submit the merger to a new vote. Fitch believes the future conclusion of the tender offer and merge of Endesa Americas S.A. and Chilectra Americas S.A. into Enersis Americas S.A. is neutral to the company's ratings.

Enersis Americas' investment grade ratings reflect its solid business platform with a strong degree of business and geographic diversification, and solid financial/operational metrics. Enersis Americas operates in four countries in the generation, transmission and distribution businesses, yet is confronted by several economic challenges facing the region, particularly in Brazil (rated 'BB', Outlook Negative) and Argentina (rated 'B', Outlook Stable). The risk of operating in lower rated sovereign environments is somewhat mitigated by the size of the exposure to these higher risk markets; only 30% of the company's 2015 pro forma EBITDA (excluding Chile) relates to non-investment grade countries (Argentina and Brazil) and approximately 67% of the dividends paid to Enersis Americas relate to investment grade countries, mainly Colombia.

The Stable Outlook is driven by Enersis Americas' adequate liquidity profile and credit metrics and the expectation that a balanced mix between generation and distributions businesses will be maintained.

Credit risks associated with the company include potential pressures from the shareholder Enel to promote any extraordinary dividends, possible environmental and/or political issues that could result in cost overruns or modifications of projects under construction; although these risks appear manageable. The ratings also consider the company's dependence on dividend payments from its subsidiaries to repay its own debt and incorporate the seasonal and regional cash flow volatility.

STRONG LEVERAGE METRICS:

On a pro forma basis, Enersis Americas maintains a strong capital structure with gross leverage defined as total debt-to-adjusted EBITDA of 1.5x as of December 2015. Adjusted EBITDA for 2015 was USD2.4 billion, versus USD3.4 billion in the predecessor company. Results slightly improved during the first half of 2016 (1H16), with EBITDA of approximately USD1.3 billion, which was approximately 12% higher than 1H15 pro forma EBITDA (excluding the Chilean operations). Argentina and Brazil represented approximately 35% of the company's EBITDA generation during the 1H16. Improved results for 2016 were supported by better results in the generation segment in the region, coupled with better results in the distribution business for Argentina and Peru which partially offset the deteriorated results related of the Brazilian distribution business. Fitch expects EBITDA for 2016-2019 to be approximately USD2.5 billion-USD3.3 billion and gross leverage measured as total debt/EBITDA to remain below 2.0x.

MODERATE EXPOSURE TO BRAZIL:

Fitch believes that after the spinoff and as a result of the company's decision to spin-off the Chilean assets from the precedent Enersis portfolio, the volatility on the company's cash flow generation has moderately increased. Brazil's economic downturn led to lower electricity demand and higher energy losses affecting the company's distribution results, which was offset by the improved results in Peru and Argentina. As of December 2015, Brazil and Argentina represented approximately 30% of the company's EBITDA; Fitch believes the company's exposure to Argentina and Brazil is mitigated by the company's solid cash flow generation from the remaining investment grade countries, which comfortably covers its hard currency denominated debt service. Per Fitch's criteria, Enersis Americas applicable country ceiling is Peru's of 'A-', and the ratings are not constrained by the country ceiling of Brazil.

MANAGEABLE INVESTMENT PROGRAM:

Fitch expects capex investment for 2016-2019 to amount approximately USD4 billion, with 75% invested in distribution to mainly reduce losses, which would improve the company's results. Fitch also believes the company's investment plan should not require additional significant indebtedness given the company's solid free cash flow generation. During 2015, the company invested USD587 million in generation on a pro forma basis (excluding the Chilean operations). The main investments in generation during 2015 were related to the construction of the hydro terminal El Quimbo (400 MW), in Colombia, which started operations on December 2015.

KEY ASSUMPTIONS

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

--Total production of 44,000 - 47,000 GWh on average per year.

Average margins per MWh for generation during 2016-2019 of: USD11 for Argentina, USD40 for Brazil, USD78 for Colombia, and USD37 for Peru;

--Average margins per MWh for distribution during 2016-2019 of: USD22 for Argentina, USD55 for Brazil, USD77 for Colombia, and USD37 for Peru;

--An average of USD1 billion of annual capex;

--Dividends 50% of net income.

RATING SENSITIVITIES

Future developments that could, individually or collectively, lead to negative rating actions include:

--A change in Enersis Americas' power generation business' commercial policy that results in an imbalanced long-term contractual position.

--A material and sustained deterioration of credit metrics (reflected in a debt to EBITDA ratio greater than 3.5x and EBITDA to interest coverage below 4x).

--The deterioration of the macroeconomic conditions, and respective sovereign ratings, in the company's key markets.

--A significant increase in Enersis Americas' exposure to non-investment grade countries; a downgrade of Brazil's sovereign rating would not necessarily trigger a downgrade of Enersis Americas' ratings.

Considerations that could lead to a positive rating action (Rating or Outlook) include:

--A material improvement in credit metrics that could be sustained over time.

--A reduction in debt levels and higher earnings retention.

--An improvement in the mix of cash flow generation towards higher credit quality markets would be viewed positively.

Once the company establishes a long-term history of sustained gross debt to adjusted EBITDA ratios under 2.5x level with a balanced geographical and business mix, the company's credit ratings could be upgraded or the Outlook revised to Positive.

LIQUIDITY

The company's liquidity continues to be solid. On a pro forma basis, the company has nearly USD1.7 billion of cash and equivalents as of June 2016, and has available committed lines of credit totaling USD211 million. This compares favorably with short-term financial debt of USD814 million for the same period.

FULL LIST OF RATING ACTIONS

Fitch has affirmed the following ratings:

Enersis Americas S.A.

--Long-Term Foreign and Local Currency Issuer Default Ratings (IDRs) at 'BBB';

--International senior unsecured bond ratings at 'BBB';

--Long-term national scale rating at 'AA-(cl)';

--National senior unsecured bond ratings at 'AA-(cl)';

--Short-term national scale rating at 'N1+';

--National short-term debt rating at 'N1+';

--National Equity Rating at 'Primera Clase Nivel 1 (cl)'.

The Rating Outlook is Stable.

Date of Relevant Rating Committee: Sept. 27, 2016

Additional information is available on www.fitchratings.com.

Applicable Criteria

Criteria for Rating Non-Financial Corporates (pub. 27 Sep 2016)

https://www.fitchratings.com/site/re/885629

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1012346

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1012346

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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Contacts

Fitch Ratings
Primary Analyst
Cinthya Ortega
Director
+1-312-606-2373
or
Secondary Analyst
Francisco Mercadal
Associate Director
+562 2499 3340
or
Committee Chairperson
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Managing Director
+1-312-368-2070
or
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elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Cinthya Ortega
Director
+1-312-606-2373
or
Secondary Analyst
Francisco Mercadal
Associate Director
+562 2499 3340
or
Committee Chairperson
Daniel R. Kastholm, CFA
Managing Director
+1-312-368-2070
or
Media Relations
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com