CHICAGO--(BUSINESS WIRE)--Fitch Ratings has assigned a foreign and local currency Issuer Default Rating (IDR) of 'BB-' to Inkia Energy Ltd (Inkia). In addition, Fitch has assigned a 'BB-' long-term rating to the company's proposed USD300 million senior unsecured debt issuance. The Rating Outlook is Stable.
Proceeds from the expected issuance would be used to repay approximately USD83 million of outstanding debt and fund an equity contribution of approximately USD150 million into its Cerro del Aguila (Cerro) power project, a 402 MW run of the river hydro electric generation unit. The balance of the funds will be kept in the company to enhance liquidity.
The ratings are supported by the strength of the credit quality of its most important subsidiary, Kallpa, which is a 561 MW Peruvian thermoelectric generation company. Inkia has a 75% participation in Kallpa, whose credit quality is supported by its contractual position and competitive cost structure. Inkia's ratings also incorporate the geographic diversification of its assets, large expansion project and expected improvements in its financial profile following the completion of these projects.
Credit Profile Linked to Kallpa
Kallpa's credit quality is supported by its competitive cost structure and its contracted position. Kallpa has entered into 34 power purchase agreements (PPAs). Combined, these PPAs amount to about 650MW of contracted capacity per year on average over the next 12 years. These agreements add to cash flow stability and predictability. They are denominated in USD, reducing the company's exposure to foreign exchange risk, as the bulk of the company's debt is denominated in the same currency.
The company is currently undergoing an expansion project, which will strengthen its financial profile. The expansion will increase installed capacity to 854 MW from 566 MW through the installation of a 288 MW combined cycle unit. This project is scheduled to be completed in 2012 and will conclude the final phase of the construction at this facility which began production in 2007 with an initial capacity of 184 MW. The project is fully funded.
Following completion, Kallpa will represent approximately 40% of cash flow to the holding company and more than half of consolidated EBITDA; EBITDA should increase by approximately USD100 million to USD150 million and decrease leverage at this subsidiary to between 2.5 - 3.0 times (x).
High Proforma Leverage
Inkia's pro forma stand alone financial profile is currently weak for the rating category. Following the debt issuance and equity infusion, representing 75% equity interest, into the Cerro del Aguila project (Cerro), proforma consolidated leverage is expected to increase to approximately 5.1 times, excluding non-recourse project finance debt at the Cerro level. The Cerro project is expected to cost USD700 million and is expected to be funded with non-recourse project-like debt and equity contribution from Inkia and its partner. In 2012, consolidated leverage, excluding Cerro, is expected to improve to approximately 3.5 times as Kallpa enters commercial operation.
As of Dec. 31, 2010, Inkia's consolidated EBITDA (plus dividends) and funds from operations (FFO) were USD130 million and USD71 million, respectively. Inkia had a total consolidated debt of USD580 million as of Dec. 31, 2010. After giving equity credit to a USD177 million intercompany loan, from parent, Israel Corp., Inkia's adjusted debt is USD403 million resulting in a leverage ratio, as measured by total debt with equity credit to EBITDA (plus dividends), of 3.1x.
Adequate Liquidity Position
Inkia's liquidity position is adequate. As of Dec. 31, 2010, the company's consolidated cash position amounted to USD120 million, of which USD39 million was at the holding company and USD81 million was at consolidated subsidiaries, USD40 million of which was at Kallpa to fund the combined cycle expansion project. Restricted cash amounted to USD7 million. The company's liquidity position is supported by dividends and disbursements, ranging between USD20 million and USD30 million, from its different subsidiaries as well as by readily monetizable assets. Inkia owns 21% of Edegel, which is the largest generation company in Peru with a current market capitalization of approximately USD1.6 billion.
The company also benefits from favorable access to the local capital markets to finance investment projects at the subsidiaries' level. Currently, the company has been able to secure 100% of the required funds to finance Kallpa's combined cycle expansion by issuing debt in the local market and raising committed equity through partners. The holding company also benefits from the financial flexibility provided by its intercompany debt as it does not carry a fixed amortization schedule and does not share collateral (shares on assets) with Inkia's bonds.
Asset Diversification:
Inkia's ratings also take into consideration the company's geographic diversification. Excluding its Peruvian operations, the company generated over 50% of its 2009 consolidated EBITDA (plus dividends) from assets located in Bolivia (rated 'B+' by Fitch), the Dominican Republic (rated 'B' by Fitch), Jamaica (rated 'B-' by Fitch), and El Salvador (rated 'BB' by Fitch). Over the next two years, cash flow from these assets will be of strategic importance for Inkia, until the Kallpa expansion is completed and begins to distribute dividends (second half of 2012).
The consolidated credit metrics of Inkia should continue to be characterized by relatively high leverage ratios in the medium term, as the company continues its expansion strategy and finances growth with debt both at project level and holding company level. On a stand alone basis, Inkia's holding company credit metrics will improve to levels consistent with the assigned rating once the current conversion to a combined cycle plant at Kallpa enters commercial operations.
Debt Structurally Subordinated
Inkia's debt is structurally subordinated to debt at the operating companies. As of Sept. 30, 2010, total debt at the subsidiary level amounted to approximately USD300 million or 75% of consolidated adjusted debt. The bulk of this debt is represented by notes issued by Kallpa to fund the capacity expansion. This project-finance like debt that has a standard covenants package including dividend restrictions and limitations on additional indebtedness. Specifically, Kallpa is restricted from making dividend payments to Inkia if its debt service coverage ratio (DSCR) falls below 1.2 times (x). Fitch's expects Kallpa's DSCR to reach its lowest point in 2014 at 1.5x.
Rating Drivers
A negative rating action could be triggered by a combination of the following factors; leverage does not moderate at Kallpa after it completes its combined cycle expansion project; Inkia pursues additional opportunities in generation without an adequate amount of additional equity; or the company's asset portfolio becomes more concentrated in countries with high political and economic risk.
Although a positive rating action is not expected in the near future, any combination of the following factor could be considered; the Peruvian operation's cash flow contribution increases beyond current expectations; and/or leverage declines materially.
Inkia is an energy holding company incorporated in Bermuda in 2007 by Israel Corp. with the purpose of acquiring Globeleq Americas Ltd's (Globeleq) electric generation assets in Latin America. Israel Corp.'s total investment in Inkia amounted to approximately USD543 million and was financed with equity and intercompany loans for the most part. Inkia holds majority (4) and minority (3) participations on seven electricity generating companies located in six Latin American countries. Inkia owns approximately 75% of Kallpa energy and holds a 21% stake on Edegel S.A.A.
Additional information avaiable at 'www.fitchratings.com
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 16, 2010);
--'Parent and Subsidiary Rating Linkage Criteria Report' (July 14, 2010);
--'Rating Hybrid Securities' (Dec. 29, 2009).
Applicable Criteria and Related Research:
Corporate Rating Methodology
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=546646
Parent and Subsidiary Rating Linkage Criteria Report
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=534826
Rating Hybrid Securities
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=493086
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