NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned a 'BB' rating to The AES Corporation's (AES, Fitch Issuer Default Rating 'BB-', Stable Outlook) expected issuance of senior unsecured floating-rate notes due in 2019. These notes rank pari passu with AES's other senior unsecured debt obligations. Proceeds from the debt issuance, along with cash on hand, will be used to redeem the existing senior secured term-loan facility, due in 2018. The Rating Outlook for AES is Stable.
The Stable Outlook reflects adequate liquidity and no significant debt maturities until 2017. Historically, over 70% of the distributions received by AES are from utilities and contracted electricity-generating assets, limiting exposure to the merchant risks. It is Fitch's expectation that management will fund new project investments using parent-level free cash flow, including proceeds of sales of non-core assets.
KEY RATING DRIVERS
Improvement in Upstream Cash Flow: Fitch expects an increase in distributions from select portfolio investments, including Indianapolis Power & Light (IPL), and internationally in Chile and Asian subsidiaries by 2016. Lower distributions from these subsidiaries in 2014 and 2015 and downstream equity contributions for new investments will pressure credit metrics during the construction period, but the construction cycle at these subsidiaries will remain manageable, in Fitch's opinion. AES's cash flow profile is subordinated to substantial levels of project debt and other covenants and restrictions typical in project level financing and is reflected in its IDR.
Exit from Non-Core Markets: In affirming the IDR, Fitch assumed that the company will continue to divest its non-core businesses and exit non-core regions. Fitch expects AES to continue to improve its credit and business risk profile by exiting non-core markets and narrow its investment focus in terms of geographical diversity.
Cash-Flow Diversity Drives Credit-Profile: AES invests in a portfolio of electric utilities and power generating assets across five continents; historically its cash flow included distributions from over 50 projects in any given year. Investment diversity shields the company from the macro- and micro-economic environment adversity affecting a local domestic electricity sector. Additionally, growth through investment in contracted assets improves cash-flow quality.
Quality of Cash-Flow: Distribution from utilities and contracted generating assets improve the overall cash-flow quality as these subsectors within the utility sector provide for long-term cash-flow visibility and stability. Fitch expects that at least 70% of AES's future cash flow over the rating horizon (2014-2016) will be from its investments in subsidiaries' operating utilities and contracted generation facilities. The average remaining life of its power sale contract is about seven years.
Higher Capital Spending: Large capital expenditure at its U.S.-based utility, Indiana Power & Light (IPL), Chilean, and Asian subsidiaries is expected to adversely affect upstream distributions through 2015. Fitch expects AES to supplement the combination of subsidiary level operating cash flow and debt with equity contributions to alleviate funding needs for large capital expenditure at these subsidiaries and is reflected in the agency's decision to affirm the IDR. Stress on credit metrics during the construction period is manageable as the company will earn contemporaneous return on its environmental capex at IPL.
Geopolitical Risks Affect Credit Profile: AES owns and operates electricity utility businesses in more than 20 countries and is thus subject to foreign exchange rate volatility and adversity in global macro-economic conditions. In addition, governmental policy in these countries as to electricity tariffs, sector growth, currency controls, and foreign direct investment also increase its business risk profile. These risks overshadow the quality of its cash flow and are reflected in the financial profile for its current IDR.
High Counterparty Credit Risks: AES continuously faces high default rates in sub-investment-grade countries, adversely affecting its subsidiary-level cash flow. These risks are common in emerging economies where state finances and the property rights are weak. Fitch forecasts are adjusted for these uncertainties and are reflected in its IDR.
Aggressive Shareholder Distribution Policy: Continuation of share buyback program without an absolute reduction in leverage remains a rating concern. The company has spent about $1 billion on its treasury stock since 2010. Additional plans include spending about $400 million through 2015. These are in addition to annual dividends of about $160 million over next two years.
Adjusted Parent-Only Cash Flow
Fitch analyzes AES as a holding company owning a portfolio of assets and investments in a global electricity sector, given its somewhat unique corporate profile and structure. Financially, this represents a deconsolidated approach with respect to AES's cash flows and debt levels. Fitch uses adjusted parent operating cash flows (APOCF), a non-GAAP measure, with its emphasis on dividends received and return on capital, to analyze AES's credit metrics. This approach, similar to the method used by AES's lenders in financial covenants, recognizes that the subsidiaries are encumbered by individual debt that is structurally superior to the debt of the corporate parent. The residual subsidiary cash flow available for upstream dividends and distributions has greater volatility than the direct cash flow of the operating subsidiaries, and may be subject to payment restrictions under subsidiary debt covenants, corporate by-laws, or national laws.
RATING SENSITIVITIES
Positive: An upgrade of AES is considered unlikely given its credit risk profile, a business model that subordinates the parent-level debt to the non-recourse debt and is subject to the financing documentation covenants. However, Fitch will consider an upgrade if Debt/APOCF ratio remains below 4.5x and APOCF/interest ratio improves to 3.5x on a sustainable basis.
Negative: Future developments that may, individually or collectively, lead to negative rating action include:
--An adverse event leading to decline in APOCF/interest to below 2.5x and a Debt/APOCF ratio that increases to 6x, on a sustainable basis;
--Leveraged acquisition;
--Material reduction in dividends received on a sustainable basis.
Additional information is available on www.fitchratings.com.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology', Aug. 05, 2013.
Applicable Criteria and Related Research:
Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=715139
Additional Disclosure
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