NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned foreign and local currency Issuer Default Ratings (IDRs) of 'CCC' and 'B-', respectively, to Central Puerto S.A. (CEPU). Fitch has simultaneously assigned a rating of 'CCC+' to CEPU's notes with an outstanding balance of USD49.4 million that have a final maturity during 2017. The 'RR3' Recovery Rating assigned to the notes reflects the expectation of a recovery in the range of 50% to 70% in the event of default due to the company's extremely strong balance sheet and Fitch's belief that a default by CEPU would most likely be driven by transfer and convertibility restrictions imposed upon the payment of foreign debt, not a material deterioration of the company's business or financial profile.
The Rating Outlook is Negative.
KEY RATING DRIVERS
Sovereign Constrained Rating
Fitch has assigned a country ceiling of 'CCC' to the Republic of Argentina, which limits the foreign currency rating of most Argentine corporates, including CEPU to 'CCC'. Country ceilings are designed to reflect the risks associated with sovereigns placing restrictions upon private sector corporates, which may prevent them from converting local currency (LC) to any foreign currency (FC) under a stress scenario, and/or may not allow the transfer of FC abroad to service FC debt obligations. Key concerns of corporates domiciled in Argentina include high inflation, government meddling, economic uncertainty, and limited access to debt markets, especially after the country's recent default. The Negative Outlook on CEPU's ratings reflects the high degree of risk for corporates operating in Argentina.
Regulatory Risk Remains High
CEPU ratings reflect high regulatory risk given strong government influence in both the electric utilities and energy sectors. CEPU operates in a strategic industry where the government has a role as the price/tariff regulator and also controls subsidies for industry players. On this basis, CEPU is highly dependent on payments from Compania Administradora del Mercado Mayorista Electrico S.A. (CAMMESA), an agency through which the government regulates the industry, as its main counterparty. Payments from CAMMESA can be volatile given its weak credit quality as it depends on the national government for funds to make these payments, and Argentina is currently suffering through a significant economic slowdown. In 2014, CAMMESA received approximately USD8.7 billion in funds from the Argentine treasury, which was a significant increase from the USD6.6 billion injection in 2013. Additionally, CAMMESA centralizes fuel management and allocation to energy generators, and therefore the company could face difficulties if CAMMESA changes its role as fuel provider.
Strong Competitive Position
CEPU owns a portfolio of well diversified generation assets in terms of technologies and geographical presence within Argentina. After the organizational restructuring carried out during the fourth quarter of 2014 (4Q14), the company owns generation capacity of close to 4 GW. It is the largest local private generator in Argentina with a 15% market share. The geographic location of CEPU's generation plants provides relevant advantages in terms of access to fuel and nearness to Buenos Aires (Sitio Puerto); to the city of Mendoza (Sitio Mendoza) and to two of the main refineries of YPF (Sitio La Plata and Sitio Mendoza). The combination of these factors gives CEPU a significant competitive advantage compared to other players of smaller scale. During the second half of 2014 (2H14), CEPU absorbed and merged the assets and liabilities of three sister companies: Hidroelectrica Piedra del Aguila (HPDA), Central Termica Mendoza (CTM) and La Plata Cogeneracion (LPC), all of them energy generators. Through these transactions, CEPU added to its 1.8 GW of thermal installed capacity an additional 2.1 GW of capacity, of which 1.4 GW is hydro. These mergers positively enhanced the company's geographic diversification within Argentina.
Strong Credit Metrics Post Merger
CEPU's credit metrics remains strong post the merger of the aforementioned sister companies. The company's total debt to EBITDA ratio, including debt with CAMMESA, stood at 2.8x, while its EBITDA-to-interest expenses coverage ratio was 4.7x. Net of the debt with CAMMESA, CEPU's gross leverage ratio was 1.4x. Fitch expects gross leverage to remain below 3.0x level in the short-to-medium term, though long-term forecasts for Argentina can be volatile and highly dependent on macroeconomic conditions in the country. The basis for this appropriate credit profile was the significant remuneration adjustments received by the sector both in 2014 and 2015, which on average increased remuneration for energy generators of 23%-25% each, together with a conservative leverage strategy.
Sound Balance Sheet
As of June 2015, CEPU had USD200 million of financial debt and USD181 million of cash and marketable securities. The company's debt is mainly composed of USD denominated notes (USD74.1 million of capital, due in 2017) and debt with CAMMESA (USD100 million). During the first days of July, the company prepaid USD24.7 million of the notes. CEPU's repayment capacity on its notes is negatively affected by the currency mismatch between its revenues in pesos and its dollar-denominated debt service. Regarding the debt with CAMMESA, it is mostly related to loans provided by the government agency for maintenance and / or improvements of generation assets. Such debt, denominated in local currency, has special conditions according to the local regulation and it will be cancelled against specific credits (accounts receivable for certain remuneration items) that CEPU has with CAMMESA, and therefore it does not result in direct cash outflows.
Positive Regulatory Rulings
CEPU has benefited from positive regulatory rulings during 2014 and 2015. Such adjustments increased the remuneration received by generators by 23% to 25%, allowing companies to at least break-even or generate slightly positive EBITDA in the electricity segment during 2015.
KEY ASSUMPTIONS
--Consistent double-digit currency depreciation per year;
--Energy production to range between 18.000GWh/year and 22.000GWh/year;
--Overall, EBITDA to be consistently in the USD100 million/year range;
--Leverage in the 2.5x level during next five years.
RATING SENSITIVITIES
CEPU's ratings could be negatively affected by a combination of the following: further economic deterioration and the Republic of Argentina's inability to convert and transfer foreign exchange for CEPU; given high dependence on the subsidies by CAMMESA from the Treasury, any further weakening of Argentina's fiscal accounts could have a negative impact on the company's collections / cash flow; a significant deterioration of credit metrics and/or sustained failure to adjust remuneration scheme for generation companies that could threaten the company's operational viability.
The resumption of timely debt service on defaulted bonds would likely lead to an upgrade of Argentina's foreign currency IDR as well as CEPU's.
LIQUIDITY
Solid Liquidity Threatened by Transfer and Convertibility Risks:
CEPU has a sound liquidity profile, although the company remains highly exposed to a further devaluation of the Argentine peso. As of June 2015, CEPU reported cash and equivalents of USD181 million, most of it denominated in ARS and located in Argentina. Some 25% of such cash (USD45 million) is located abroad and denominated in USD, mainly invested in Argentine sovereign bonds. According to CEPU, such bonds could be used to repay its USD denominated debt in the event restrictions to transfer funds abroad are tighter in the future. The company's reported cash and equivalent of USD181 million positively compares to short-term debt of USD106 million. Excluding debt with CAMMESA, the coverage ratio would stand at 3.6x.
Additional information is available on www.fitchratings.com.
Applicable Criteria
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 17 Aug 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869362
Rating Non-Financial Corporates Above the Country Ceiling (pub. 02 Feb 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=859368
Recovery Ratings and Notching Criteria for Utilities (pub. 05 Mar 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=863298
Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=990349
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=990349
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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