CHICAGO--(BUSINESS WIRE)--Fitch Ratings has assigned foreign and local currency Issuer Default Ratings (IDRs) of 'BBB-' to Consorcio Transmantaro S.A. (CTM). Fitch also expects to rate CTM's proposed USD450 million senior unsecured debt issuance due 2023 'BBB-'. The Rating Outlook is Stable. The company expects to use the proceeds from the debt issuance to repay nearly all current outstanding debt.
CTM's ratings reflect the company's stable and predictable cash flow generation, coupled with an adequate financial profile and moderate to low regulatory risk. The ratings also consider implicit support from CTM's shareholders, which at times have supported the company through subordinated intercompany loans and direct support for project developments.
KEY RATING DRIVERS
Stable and Predictable Cash Flow Generation:
CTM's ratings reflect the company's stable and predictable cash flow generation, characteristic of electricity transmission companies, due to its fixed revenues and stable costs. The company operates its assets under eight concessions, the first of which began in 1998 and was granted for 33 years. The other concessions were granted thereafter for periods of 30 years plus two to three years for construction. The last concession expires in 2045. 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 adjusted annually 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.
High, Declining Leverage:
CTM's leverage is high for the rating category, and it is expected to decline to levels more in line with the assigned rating by 2015 once the existing pipeline of expansion projects is completed. As of Dec. 31, 2012 and on a pro forma basis after given effect to the proposed issuance, the company's leverage, as measured by total debt to adjusted EBITDA, is approximately 9.7x. In 2013, CTM's adjusted leverage is expected drop to 7.7x as EBITDA increases by 60% to USD75 million from USD47 million in 2012. The large increase in EBITDA is the result of the Zapallal - Trujillo transmission line that started operations in December 2012; pro-forma leverage is around 6.0x given the current EBITDA run rate and excluding expected non-recourse project debt associated with capacity additions and new transmission line projects currently in process.
Currently, CTM has several ongoing expansion projects that are expected to require approximately USD190 million of additional investments, which the company expects to finance mostly with non-recourse debt given that the capital contributions for these projects (which is usually 30% of total investment) has been disbursed. By year-end 2015 and following the completion of the existing portfolio of projects, CTM adjusted EBITDA should range between US$100 and US$110 million and leverage should approximate 6.0x to 6.5x.
As of year-end 2012, CTM's debt was composed of USD167 million of local bank debt and USD164 million of non-recourse project finance debt. The company also had USD120 million of subordinated intercompany debt. All of the outstanding debt as of year-end 2012 is expected to be refinanced with the proposed issuance. Going forward, the company expects to finance its expansion projects with non-recourse project-finance debt, which it could possibly refinance with corporate debt after the projects are completed, yet, without materially affecting the company's leverage metrics.
Moderate to Low Regulatory Risk:
A portion of CTM's revenues are subject to annual regulatory review, which exposes the company's revenues to potential changes to regulated tariffs. During 2012, approximately 70% of CTM's revenues came from the company's main concession, the Mantaro-Socabaya transmission line, which was granted under a different regulatory scheme from the prevailing one and could adjust the return on investment rate portion of the tariff. This risk is low to moderate given the track record of the regulator, the currently low interest rate environment, which is somewhat offset by the improving sovereign backdrop in Peru (lowers the sovereign risk premium), and the small proportion of cost transmission represents in total electricity cost passed on to the final consumer.
The company derives the remaining 30% of its revenues from new concessions under the current regulatory scheme and bilateral contracts for complementary transmission lines. The tariffs for the new concessions establish a fixed annual rate of return, which is set during the bidding process, indexed to U.S. PPI and fixed for the duration of the concession. CTM's revenues from new concessions would increase as a percentage of total revenues overtime.
CTM Strategic Importance for the Country:
CTM's main transmission concession is the Mantaro-Socabaya line, which created the national interconnected system (SEIN) serving almost all of the country's population. CTM has an approximately 20% market share based on revenues and, together with its sister company REP, the two companies accounts for approximately 70% of the transmission market in Peru. Future expansions for the group are expected to be developed by CTM.
Positive Shareholders Support:
CTM is owned 60% by Interconexion Electrica S.A. E.S.P. (ISA; rated 'BBB-', Outlook Positive) and 40% by Empresa de Energia de Bogota (EEB; rated 'BBB-', Outlook Stable) CTM's shareholders 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 expects lower cash injections from CTM's shareholders, low to no dividends during expansion projects and for CTM's shareholders to continue providing equity pledges for the company's future projects.
RATING SENSITIVITIES
Although a negative rating action is not expected in the short term, failure to lower leverage below 7.0x and close to 6.0x over the medium term 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 or it lowers the expected return on new expansion projects in order to win more concessions.
A positive rating action could occur if the company lowers its leverage level below 5.0x in a sustained basis.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 8, 2012).
--'Parent and Subsidiary Rating Linkage' (Aug. 8, 2012).
Applicable Criteria and Related Research
Corporate Rating Methodology
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=684460
Parent and Subsidiary Rating Linkage
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685552
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=789229
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