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AES Corporation, (The) -- Moody's assigns Ba3 (hyb) rating to AES preferred stock

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Rating Action: Moody's assigns Ba3 (hyb) rating to AES preferred stockGlobal Credit Research - 04 Mar 2021Up to $1,000 million of securities ratedNew York, March 04, 2021 -- Moody's Investors Service, ("Moody's") has assigned a Ba3 (hyb) rating to AES Corporation, (The)'s (AES) proposed Series A Cumulative Perpetual Convertible Preferred Stock cumulative perpetual preferred stock. The outlook of AES is stable.AES intends to use the net proceeds from this offering to fund its investments, including in renewables and liquified natural gas infrastructure, as well as to make contributions to its regulated utility subsidiaries.RATINGS RATIONALEThe Ba3 (hyb) rating assigned to the preferred stock is two notches below AES' corporate family rating (CFR) of Ba1 and reflects its relative position in the company's capital structure compared to its senior unsecured debt. The preferred stock is subordinated, and junior in right of payment, to nearly $3.5 billion of AES unsecured debt.This two notch differential is consistent with our methodology guidance for notching corporate instrument ratings based on differences in security and priority of claim.Moody's considers these securities to have sufficient equity-like features to receive hybrid securities basket "E" treatment, which is equivalent to 100% equity. Should AES' credit quality improve such that the company is rated investment grade, the preferred stock could receive basket "C" treatment (i.e. 50% equity and 50% debt) for the purpose of adjusting financial statements. Please refer to Moody's cross-sector rating methodology, "Hybrid Equity Credit" (September 2018) for further details.AES' Ba1 CFR considers the resilience shown by the group's operations in the face of economic disruptions caused by the coronavirus pandemic in 2020. This resilience has been evidenced by AES' ability to record a consolidated ratio of cash flow from operations pre changes in working capital (CFO pre-W/C) to net debt of 13.8% at year-end 2020 compared to 13.2% at year-end 2019. AES' total net debt reduction of nearly $1.5 billion during the last quarter of 2020, contributed to the improvement from the ratio of 11.7% recorded for the last twelve month period ended September 30, 2020. These debt reduction included total net repayments of AES' parent debt of nearly $500 million during the last quarter of 2020 as well as repayment of subsidiaries' debt of around $250 million. In addition, at year-end 2020, AES started to report around $1 billion debt outstanding at Mong Duong 2 under held-for-sale liabilities following the agreement entered to sell its 51% interest in this the Vietnamese coal-fired generation subsidiary in December 2020.AES recently disclosed plans to make equity contributions to its subsidiaries of around $4.8 billion during the 2021-2025 period, a significant increase compared to around $2.9 billion during the 2016-2020 period (including the acquisition of an interest in sPower for $382 million in 2017). The purpose of these contributions is to help the subsidiaries to fund their material investment programs in renewables and natural gas related infrastructure.Our view as to whether AES will report additional, sustainable improvements in its consolidated credit metrics is tempered by the impact on its consolidated financial performance of: (i) the subsidiaries' incremental debt, associated with their large capital expenditure (capex) programs; (ii) the consolidation of the recently created AES Clean Energy, following the merger of sPower and AES Distributed Energy in January 2021; (iii) AES' planned holding company debt issuance of $1 billion; and (iv) whether the newly issued $1 billion of preferred stock will be fully redeemed with common stock in March 2024.OutlookThe stable outlook considers AES' progress in continuing to implement its business de-risking initiatives, including reducing its exposure to carbon transition risks. Additionally, the stable outlook reflects our expectation that AES' 3-year ratio of consolidated CFO pre W/C to consolidated net debt of approximately 13-14% over the next 12 months.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGFactors that Could Lead to an UpgradeAES' ratings could be upgraded if the company continues to be successful in executing its construction projects and in de-risking its business and if there is a continued improvement in its consolidated financial profile, where the ratio of consolidated CFO pre-W/C to consolidated net debt will exceed 14% on a sustained basis.Factors that Could Lead to a DowngradeA downgrade could occur if AES diverges from its de-risking business strategy or implements more aggressive financial policies, if consolidated leverage ratios increase, or if a more contentious regulatory environment emerges in any of AES' key subsidiary jurisdictions (Indiana or Ohio). Ratings could also be downgraded if the ratio of CFO pre-W/C to consolidated net debt falls below 11%, for a sustained period of time.Liquidity AnalysisThe Speculative Grade Liquidity Rating (SGL) of SGL-2 reflects good liquidity from both strong internal cash flow generation and external cash sources, including' availability under its $1 billion unsecured bank credit facility of $853 million at year-end 2020. The Borrowings available excluded $77 million in letters of credit at year-end 2020. Borrowings under the facility, scheduled to expire in 2024, are subject to conditionality including a material adverse change clause representation, a credit negative. The facility has two financial covenants including a minimum cash flow coverage ratio of 2.5x and a maximum recourse debt to cash flow ratio of not more than 5.75x (both metrics calculated on a parent only basis). We anticipate that AES will remain in compliance with substantial headroom.The SGL-2 also factors in management's expectation that the company's free cash flow will range between $775 million and $825 million in 2021. AES also expects to receive net proceeds from the sale of assets of around $100 million this year. AES has disclosed that during the 2021-2025 period, it expects to have access to around $7.3 billion of discretionary cash that includes nearly $4.8 billion of parent free cash flow dividends received (minus parent company costs such as interest payments) and total net proceeds from assets sales of $500 million (including the aforementioned $100 million). AES has also disclosed that it plans to use these funds to make equity contributions to its subsidiaries of $4.8 billion and to distribute around $2.5 billion.The principal methodology used in this rating was Unregulated Utilities and Unregulated Power Companies published in May 2017 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1066389. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.REGULATORY DISCLOSURESFor further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.The rating has been disclosed to the rated entity or its designated agent (s) and issued with no amendment resulting from that disclosure.This rating is solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1243406.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating. Natividad Martel Vice President - Senior Analyst Infrastructure Finance Group Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. 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