Fitch Downgrades AES El Salvador's IDR to 'B+'; Outlook Revised to Stable

MONTERREY, Mexico--()--Fitch Ratings has downgraded AES El Salvador Trust II's (AES El Salvador) foreign and local currency Issuer Default Ratings (IDRs) to 'B+' from 'BB' and revised the Rating Outlook to Stable from Negative. In addition, Fitch has downgraded the company's USD310 million senior unsecured notes due 2023 to 'B+/RR4' from 'BB'.

The downgrade is driven by Fitch's recent Sovereign rating downgrade of El Salvador to 'B+' from 'BB-' with Stable Outlook, along with the country ceiling downgrade to 'BB' from 'BB+'. The new Sovereign rating category highlights the credit profile deterioration of the subsidy payment source to electricity companies. AES El Salvador's rating considers the company's exposure to the sustained weakening macroeconomic conditions in El Salvador, which could affect electricity demand, collections and non-technical electric losses.

KEY RATING DRIVERS

AES El Salvador revenues and cash generation are likely to continue to rely on government subsidies. Currently the government subsidizes residential users with a monthly consumption of 99 kilowatt hours (kWh) or less. The country's users connected to the distribution system with energy consumption of 99 kWh or less represent 66.2% of total users, which accentuates the importance of the government subsidies to the country.

Approximately 80% of AES El Salvador's customers received subsidies. AES El Salvador received subsidies of approximately USD136.1 million in 2014 and USD136.9 million in 2013, representing approximately 16% of total revenues. During the LTM ended March 2015 the company generated USD81.4 million in EBITDA, up from USD76.9 million in FY2014. 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.

Additionally, in the past the government implemented an extraordinary subsidy for users with consumption below 200 kWh, which was reviewed quarterly and represented between 15%-20% of total 2014 subsidies. Beginning April 15, 2015, this extraordinary subsidy was eliminated. Fitch expects that AES El Salvador subsidies for 2015 will be lower than in 2014 due to lower energy costs, while maintaining a debt-to-EBITDA ratio between 3.5x-4.0x and stable liquidity.

AES El Salvador Trust II 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.

RATING SENSITIVITIES

--AES El Salvador's ratings could be negatively affected by any combination of the following factors: a Sovereign downgrade; deterioration of the operating environment resulting from regulatory changes that may impact working capital requirements and increase exposure to subsidies that in turn leads to increased leverage above 4x; liquidity deterioration due to energy costs not recovered through government subsidies; or further political or regulatory intervention that negatively affects the company's financial performance.

--An upgrade is not likely in the near term due to the weakening macroeconomic conditions of El Salvador, and the strong reliance on government subsidies. AES El Salvador's ratings could be positively affected by improving macroeconomic conditions in El Salvador in conjunction with a sustainable leverage reduction (to below 3x); and regulatory stability.

KEY ASSUMPTIONS

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

--Energy sales (GWh) growth of 1.0% from 2015-2018;

--AES El Salvador's distribution companies maintain its strong market share participation;

--No elimination of subsidies (below 99Kwh consumption); government subsidies continue to be paid in a timely manner;

--Capital Expenditures around USD35 million per year;

--Gross leverage around 3.5x in the next three years.

Additional information is available on www.fitchratings.com

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

Additional Disclosures

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https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=987900

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=987900

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Contacts

Fitch Ratings
Primary Analyst
Alberto Moreno
Senior Director
+52 81 8399 9100
Fitch Mexico S.A. de C.V.
Prol. Alfonso Reyes 2612,
Monterrey, N.L. Mexico
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:
Alyssa Castelli, +1 212-908-0540
alyssa.castelli@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Alberto Moreno
Senior Director
+52 81 8399 9100
Fitch Mexico S.A. de C.V.
Prol. Alfonso Reyes 2612,
Monterrey, N.L. Mexico
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:
Alyssa Castelli, +1 212-908-0540
alyssa.castelli@fitchratings.com