- Oops!Something went wrong.Please try again later.
- Oops!Something went wrong.Please try again later.
Rating Action: Moody's changes Angamos' outlook to negative; affirms ratings
Global Credit Research - 14 Aug 2020
New York, August 14, 2020 -- Moody's Investors Service, ("Moody's") affirmed the Baa3 senior secured rating of Empresa Electrica Angamos SpA (Angamos) and changed the outlook to negative from stable.
On 8 August 2020, AES Gener S.A. (Baa3 stable) announced that its wholly-owned subsidiary Angamos entered into agreements with its two key off-takers regarding the amounts due and the form of the payments in connection with the early termination of their Power Purchase Agreements (PPAs). Moody's anticipates that the recent agreements will become binding after the parties meet certain conditions on 31 August 2020. Angamos' key off-takers are Minera Escondida Limitada (MEL; Baa2 stable) and Minera Spence S.A. (Spence), since their contracts represent 86% of Angamos' contracted capacity.
"Today's rating action reflects the execution risk associated with Angamos' planned early redemption of the 144(Reg)A senior secured notes" said Nati Martel, Vice President -- Senior Analyst. "This risk heightens the uncertainty over Angamos' credit quality amid our expectation that the agreements achieved between Angamos and its key off-takers to terminate their PPAs will become effective on 31 August 2020", added Martel.
The affirmation of Angamos' Baa3 senior secured rating factors in the announcement of its parent company, AES Gener S.A. (Gener, Baa3 stable), on 8 August 2020, that the subsidiary reached agreements with its two key off-takers, namely Minera Escondida Limitada (MEL) and Minera Spence S.A. (Spence), regarding the final amount and the timing of the payments related to the early termination of their contracts. The affirmation assumes that the agreements will become binding at the end of August 2020 after certain conditions are met.
While the contract termination and the likely receipt of more than $700 million is a credit positive development, the lack of mandatory redemption clause language raises the prospect that a portion some of the bonds will remain outstanding after the termination of the contracts, leaving bondholders' exposed to merchant risk. Gener's management has disclosed that it plans to redeem the notes at nominal value before year-end 2020. As of June 2020, the outstanding balance under the amortizing notes aggregated $388 million with the next debt service payments due in November 2020. Management has also indicated the possibility of an early redemption of at least a portion of the local bank loan, subject to the costs of unwinding the bank loan hedges. The outstanding balance under the loan was $135 million at the end of June 2020.
Gener plans to fund the early redemption of the Angamos' notes with net proceeds (after tax payments) received from Spence's termination payment of $110 million that will become due at the end of August 2020. In addition, Gener will also use the net proceeds of $610.4 million received in connection with the monetization of MEL's future contract payments. To that end, Gener entered into a financial arrangement with a financial institution. The agreements reached on August 8 will become binding after these three conditions are met.
The negative outlook factors in the execution risk of the full redemption of the notes and the uncertainty around Angamos' credit quality going forward, should any notes amount remain outstanding after the completion of the debt early redemption process. The credit deterioration considers that Angamos will largely operate as a merchant power generation project after the early termination of the PPAs with MEL (342 MW) and Spence (90MW) becomes effective at the end of August 2021. The negative outlook also considers the uncertainty around Angamos' counterparty risk exposure under its remaining contract with Quebrada Blanca expansion (QB2; unrated) that is scheduled to expire in 2037.
Environmental considerations incorporated into our credit analysis for Angamos factor in its significant fossil fuel exposure (100% coalfired facility), the Chilean carbon regulations and carbon reduction targets, as well as the high aggressive penetration of cleaner fuels (particularly solar and wind) amid the country's aggressive renewables and the mining industry sustainability goals.
We acknowledge that Angamos' variable costs compare (that remain below $30/MWh) well with those of its Chilean peers, including Gener's other coal fired plants such as Cochrane (over $30/MWh), as well as Norgener and Ventanas (over $30/MWh), and with the average spot power prices that currently hover around $40/MWh. We also factor in that Angamos' base coal-fired load generation is still needed for reliability purposes in Chile which drives our expectation that Angamos will further collect capacity payments until the maturity of its outstanding debt in 2029.
However, after the termination of the MEL and Spence PPAs (86% of its contracted load) becomes effective, Angamos will become largely a merchant plant given the challenges to r-contract coal-fired facilities load. The robust terms of Angamos' PPAs underpinned our view that its historical exposure to carbon transition risk was moderate within the power generation sector. The availability-based PPAs include fixed charges that are sized to cover the generator's fixed costs, including its debt service; and monthly indexation clauses and energy allowance clauses that secure the plant's cash flow during the annual maintenance and major overhaul periods, as well as during certain extended forced outages. The remuneration for ancillary services is still pending in Chile, while the continued decline in the cost of renewables and battery storage poses a substantial ongoing pressure on the local power prices and exposes coal-fired generation companies to uncertainties over the long term. Angamos' ability to collect capacity payments along with the reduced contracted cash flows under its remaining 80MW availability based PPA with QB2 may not suffice to cover all of the issuer's fixed costs. Therefore, from a credit perspective, an early redemption of the projects' notes is important.
Social risks are primarily related to health and safety, as well as demographic and societal trends. Corporate governance considerations include the financial policy and risk management of Angamo's shareholder Gener. A strong financial position is an important characteristic for managing environmental and social risks.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATING
Factors that could lead to a downgrade
After the early termination of the MEL and Spence, PPAs become effective and to the extent that any amounts remain outstanding under the notes, a rating downgrade is possible particularly given the project's partial exposure to market risk or if we assess that there is a deterioration in Angamos' counterparty risk. A downgrade is also likely if we perceive that Angamos' exposure to carbon transition risk increases because of its largely merchant-based operations do not insulate the plant's cash flow from the declining coal-fired output amid the growing penetration of renewables in the Chilean energy mix.
Factors that could lead to an upgrade
Limited upward pressure exists on Angamos' rating over the next few years, given the termination of its two largest contracts, and the uncertainties around the issuer's future exposure to counterparty risk following the release of QB2's shareholders' guarantees, as well as to carbon transition risk. In the absence of a material deterioration in Angamos' business risk profile, including off-taker risk, the rating could experience positive momentum if Angamos is able to maintain a DSCR in excess of 1.9x, based on its contracted cash flow, on a sustained basis.
The principal methodology used in this rating was Power Generation Projects Methodology published in July 2020 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1236893. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.
For 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_1133569.
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.
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. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Alejandro Olivo Associate Managing Director Sub-Sovereign Group JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Releasing Office: Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653
© 2020 Moody's Corporation, Moody's Investors Service, Inc., Moody's Analytics, Inc. and/or their licensors and affiliates (collectively, "MOODY'S"). All rights reserved.
CREDIT RATINGS ISSUED BY MOODY'S INVESTORS SERVICE, INC. AND/OR ITS CREDIT RATINGS AFFILIATES ARE MOODY'S CURRENT OPINIONS OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES, AND MATERIALS, PRODUCTS, SERVICES AND INFORMATION PUBLISHED BY MOODY'S (COLLECTIVELY, "PUBLICATIONS") MAY INCLUDE SUCH CURRENT OPINIONS. MOODY'S INVESTORS SERVICE DEFINES CREDIT RISK AS THE RISK THAT AN ENTITY MAY NOT MEET ITS CONTRACTUAL FINANCIAL OBLIGATIONS AS THEY COME DUE AND ANY ESTIMATED FINANCIAL LOSS IN THE EVENT OF DEFAULT OR IMPAIRMENT. SEE MOODY'S RATING SYMBOLS AND DEFINITIONS PUBLICATION FOR INFORMATION ON THE TYPES OF CONTRACTUAL FINANCIAL OBLIGATIONS ADDRESSED BY MOODY'S INVESTORS SERVICE CREDIT RATINGS. CREDIT RATINGS DO NOT ADDRESS ANY OTHER RISK, INCLUDING BUT NOT LIMITED TO: LIQUIDITY RISK, MARKET VALUE RISK, OR PRICE VOLATILITY. CREDIT RATINGS, NON-CREDIT ASSESSMENTS ("ASSESSMENTS"), AND OTHER OPINIONS INCLUDED IN MOODY'S PUBLICATIONS ARE NOT STATEMENTS OF CURRENT OR HISTORICAL FACT. MOODY'S PUBLICATIONS MAY ALSO INCLUDE QUANTITATIVE MODEL-BASED ESTIMATES OF CREDIT RISK AND RELATED OPINIONS OR COMMENTARY PUBLISHED BY MOODY'S ANALYTICS, INC. AND/OR ITS AFFILIATES. MOODY'S CREDIT RATINGS, ASSESSMENTS, OTHER OPINIONS AND PUBLICATIONS DO NOT CONSTITUTE OR PROVIDE INVESTMENT OR FINANCIAL ADVICE, AND MOODY'S CREDIT RATINGS, ASSESSMENTS, OTHER OPINIONS AND PUBLICATIONS ARE NOT AND DO NOT PROVIDE RECOMMENDATIONS TO PURCHASE, SELL, OR HOLD PARTICULAR SECURITIES. MOODY'S CREDIT RATINGS, ASSESSMENTS, OTHER OPINIONS AND PUBLICATIONS DO NOT COMMENT ON THE SUITABILITY OF AN INVESTMENT FOR ANY PARTICULAR INVESTOR. MOODY'S ISSUES ITS CREDIT RATINGS, ASSESSMENTS AND OTHER OPINIONS AND PUBLISHES ITS PUBLICATIONS WITH THE EXPECTATION AND UNDERSTANDING THAT EACH INVESTOR WILL, WITH DUE CARE, MAKE ITS OWN STUDY AND EVALUATION OF EACH SECURITY THAT IS UNDER CONSIDERATION FOR PURCHASE, HOLDING, OR SALE.
MOODY'S CREDIT RATINGS,ASSESSMENTS, OTHER OPINIONS, AND PUBLICATIONS ARE NOT INTENDED FOR USE BY RETAIL INVESTORS AND IT WOULD BE RECKLESS AND INAPPROPRIATE FOR RETAIL INVESTORS TO USE MOODY'S CREDIT RATINGS, ASSESSMENTS, OTHER OPINIONS OR PUBLICATIONS WHEN MAKING AN INVESTMENT DECISION. IF IN DOUBT YOU SHOULD CONTACT YOUR FINANCIAL OR OTHER PROFESSIONAL ADVISER.
ALL INFORMATION CONTAINED HEREIN IS PROTECTED BY LAW, INCLUDING BUT NOT LIMITED TO, COPYRIGHT LAW, AND NONE OF SUCH INFORMATION MAY BE COPIED OR OTHERWISE REPRODUCED, REPACKAGED, FURTHER TRANSMITTED, TRANSFERRED, DISSEMINATED, REDISTRIBUTED OR RESOLD, OR STORED FOR SUBSEQUENT USE FOR ANY SUCH PURPOSE, IN WHOLE OR IN PART, IN ANY FORM OR MANNER OR BY ANY MEANS WHATSOEVER, BY ANY PERSON WITHOUT MOODY'S PRIOR WRITTEN CONSENT.
MOODY'S CREDIT RATINGS,ASSESSMENTS, OTHER OPINIONS AND PUBLICATIONS ARE NOT INTENDED FOR USE BY ANY PERSON AS A BENCHMARK AS THAT TERM IS DEFINED FOR REGULATORY PURPOSES AND MUST NOT BE USED IN ANY WAY THAT COULD RESULT IN THEM BEING CONSIDERED A BENCHMARK.
All information contained herein is obtained by MOODY'S from sources believed by it to be accurate and reliable. Because of the possibility of human or mechanical error as well as other factors, however, all information contained herein is provided "AS IS" without warranty of any kind. MOODY'S adopts all necessary measures so that the information it uses in assigning a credit rating is of sufficient quality and from sources MOODY'S considers to be reliable including, when appropriate, independent third-party sources. However, MOODY'S is not an auditor and cannot in every instance independently verify or validate information received in the rating process or in preparing its Publications.
To the extent permitted by law, MOODY'S and its directors, officers, employees, agents, representatives, licensors and suppliers disclaim liability to any person or entity for any indirect, special, consequential, or incidental losses or damages whatsoever arising from or in connection with the information contained herein or the use of or inability to use any such information, even if MOODY'S or any of its directors, officers, employees, agents, representatives, licensors or suppliers is advised in advance of the possibility of such losses or damages, including but not limited to: (a) any loss of present or prospective profits or (b) any loss or damage arising where the relevant financial instrument is not the subject of a particular credit rating assigned by MOODY'S.
To the extent permitted by law, MOODY'S and its directors, officers, employees, agents, representatives, licensors and suppliers disclaim liability for any direct or compensatory losses or damages caused to any person or entity, including but not limited to by any negligence (but excluding fraud, willful misconduct or any other type of liability that, for the avoidance of doubt, by law cannot be excluded) on the part of, or any contingency within or beyond the control of, MOODY'S or any of its directors, officers, employees, agents, representatives, licensors or suppliers, arising from or in connection with the information contained herein or the use of or inability to use any such information.
NO WARRANTY, EXPRESS OR IMPLIED, AS TO THE ACCURACY, TIMELINESS, COMPLETENESS, MERCHANTABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE OF ANY CREDIT RATING, ASSESSMENT, OTHER OPINION OR INFORMATION IS GIVEN OR MADE BY MOODY'S IN ANY FORM OR MANNER WHATSOEVER.
Moody's Investors Service, Inc., a wholly-owned credit rating agency subsidiary of Moody's Corporation ("MCO"), hereby discloses that most issuers of debt securities (including corporate and municipal bonds, debentures, notes and commercial paper) and preferred stock rated by Moody's Investors Service, Inc. have, prior to assignment of any credit rating, agreed to pay to Moody's Investors Service, Inc. for credit ratings opinions and services rendered by it fees ranging from $1,000 to approximately $2,700,000. MCO and Moody's investors Service also maintain policies and procedures to address the independence of Moody's Investors Service credit ratings and credit rating processes. Information regarding certain affiliations that may exist between directors of MCO and rated entities, and between entities who hold credit ratings from Moody's Investors Service and have also publicly reported to the SEC an ownership interest in MCO of more than 5%, is posted annually at www.moodys.com under the heading "Investor Relations — Corporate Governance — Director and Shareholder Affiliation Policy."
Additional terms for Australia only: Any publication into Australia of this document is pursuant to the Australian Financial Services License of MOODY'S affiliate, Moody's Investors Service Pty Limited ABN 61 003 399 657AFSL 336969 and/or Moody's Analytics Australia Pty Ltd ABN 94 105 136 972 AFSL 383569 (as applicable). This document is intended to be provided only to "wholesale clients" within the meaning of section 761G of the Corporations Act 2001. By continuing to access this document from within Australia, you represent to MOODY'S that you are, or are accessing the document as a representative of, a "wholesale client" and that neither you nor the entity you represent will directly or indirectly disseminate this document or its contents to "retail clients" within the meaning of section 761G of the Corporations Act 2001. MOODY'S credit rating is an opinion as to the creditworthiness of a debt obligation of the issuer, not on the equity securities of the issuer or any form of security that is available to retail investors.
Additional terms for Japan only: Moody's Japan K.K. ("MJKK") is a wholly-owned credit rating agency subsidiary of Moody's Group Japan G.K., which is wholly-owned by Moody's Overseas Holdings Inc., a wholly-owned subsidiary of MCO. Moody's SF Japan K.K. ("MSFJ") is a wholly-owned credit rating agency subsidiary of MJKK. MSFJ is not a Nationally Recognized Statistical Rating Organization ("NRSRO"). Therefore, credit ratings assigned by MSFJ are Non-NRSRO Credit Ratings. Non-NRSRO Credit Ratings are assigned by an entity that is not a NRSRO and, consequently, the rated obligation will not qualify for certain types of treatment under U.S. laws. MJKK and MSFJ are credit rating agencies registered with the Japan Financial Services Agency and their registration numbers are FSA Commissioner (Ratings) No. 2 and 3 respectively.
MJKK or MSFJ (as applicable) hereby disclose that most issuers of debt securities (including corporate and municipal bonds, debentures, notes and commercial paper) and preferred stock rated by MJKK or MSFJ (as applicable) have, prior to assignment of any credit rating, agreed to pay to MJKK or MSFJ (as applicable) for credit ratings opinions and services rendered by it fees ranging from JPY125,000 to approximately JPY250,000,000.
MJKK and MSFJ also maintain policies and procedures to address Japanese regulatory requirements.