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Investment Energy Resources Limited (IERL) -- Moody's Assigns a Ba3 Rating to IERL; Outlook Stable

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Rating Action: Moody's Assigns a Ba3 Rating to IERL; Outlook StableGlobal Credit Research - 12 Apr 2021New York, April 12, 2021 -- Moody's Investors Service, ("Moody's") today assigned a Ba3 rating to Investment Energy Resources Limited (IERL)'s ("IERL" or "Issuer") proposed up to $700 million Reg S / 144 A Senior Secured Notes due 2031 ("Notes"). At the same time, Moody's assigned a Corporate Family Rating of Ba3 to IERL. This is the first time Moody's assign ratings to IERL. The outlook on the rating is stable.The Notes will be jointly and severally guaranteed on an unsubordinated basis by certain IERL's subsidiaries ("Guarantors") and be secured on a first-priority basis by most of the Common Stock of the Guarantors ("Collateral"). The Notes will also rank pari passu with a $300 million amortizing bank facility.Assignments:..Issuer: Investment Energy Resources Limited (IERL)....Senior Secured Regular Bond/Debenture, Assigned Ba3..Corporate Family Rating:, Assigned Ba3Outlook Actions:..Issuer: Investment Energy Resources Limited (IERL)....Outlook, Assigned StableThe ratings assigned to the proposed debentures are based on preliminary documentation. Moody's does not anticipate changes in the main conditions that the debentures will carry. Should issuance conditions and/or final documentation deviate from the original ones submitted and reviewed by the rating agency, Moody's will assess the impact that these differences may have on the ratings and act accordingly.RATINGS RATIONALEThe Ba3 rating assigned to IERL proposed Notes is supported by the diverse portfolio of renewable assets that have demonstrated adequate operational performance in recent years.IERL and its subsidiaries control a total of 763 MW of installed capacity through five hydro plants, eight wind plants and four solar plants. These assets are located in Guatemala (Government of Guatemala, Ba1 negative), Honduras (Government of Honduras, B1 stable), Costa Rica (Government of Costa Rica, B2 negative), Nicaragua (Government of Nicaragua, B3 stable) and the Dominican Republic (Government of Dominican Republic, Ba3 stable). In addition, IERL owns 50% of the equity in a joint venture with The AES Corporation ("Bósforo"), which owns several solar plants for a total of 100 MW of installed capacity in El Salvador (Government of El Salvador, B3 negative). IERL also owns two commercialization and trading subsidiaries in Guatemala and El Salvador, Ion Energy S.A. ("Ion Energy") and Eon Energy, S.A. de C.V. ("Eon Energy"), respectively, that focus primarily on selling excess energy and capacity supply not linked to a PPA.The assets are fully contracted under long-term, fixed-price USD dollar denominated power purchase agreements (PPAs), with the exception of the hydro assets in Guatemala. On a consolidated basis, more than 90% of the total installed capacity is fully contracted with an average remaining life of more than 13 years, exceeding the term of the Notes. Nevertheless, the non-amortizing profile of the Notes introduces refinancing risk. The assets are geographically diversified, with no one market accounting for more than 30% of EBITDA (as of 2020). Furthermore, the rating considers IERL's very modest capital expenditures projected through the life of the Notes, a credit positive.While the long-term contracts provide the benefit of cash flow visibility, the rating is constrained by the credit quality of the PPA off-takers. Approximately 70% of PPA contracted EBITDA (as of 2020) is derived from contracts with either B-rated off takers or unrated off-takers that operate in countries in the B-rating range. IERL's most important off-takers include: Energuate Trust (Ba2 stable), EEGSA (unrated), a subsidiary of Empresas Públicas de Medellin E.S.P. (Baa3 negative) in Guatemala (Government of Guatemala, Ba1 negative); Empresa Nacional de Energía Eléctrica ("ENEE" unrated) under a PPA that benefits from the guarantee of the Government of Honduras (B1 stable); and the government-owned Instituto Costarricense de Electricidad (ICE) (B1 negative) in Costa Rica (Government of Costa Rica, B2 negative). Together, the PPA contracts in Guatemala, Honduras and Costa Rica contribute with approximately 80% of total EBITDA.In Moody's Base Case, which considers a P90 generation scenario, key financial metrics reflect a relatively high leverage as measured by an average ratio of Cash interest coverage (CFO + interest / interest) and CFO / Debt of 3.0x and 12.0% respectively, over the first three full years of the life of the transaction (2022-2024), which are well positioned to a Ba3 rating. Nevertheless, these metrics are counterbalanced by a weak RCF (Funds from Operations -- Dividends) / Debt ratio that averages 2.5% (2022-2024) reflecting potential large cash distributions to the shareholders through equity redemptions.Moody's recognizes that the Notes contain restrictive limitations on additional indebtedness and dividend distributions that would prevent the company to increase its leverage. Limitations on additional indebtedness require a leverage ratio of debt to EBITDA of 5.25x until the first anniversary of the transaction. The ratio decreases gradually on a yearly basis until reaching 4.5x after the 5th anniversary. In addition, indebtedness is restricted to a Debt Service Coverage Ratio of 1.35x. The Notes also set out limitations on asset sales and corporate activity to restrict unrelated business activity and on the amount of assets that can be acquired. Our assessment also considers IERL's available facilities for approximately $50 million which provides some liquidity for unforeseen cost overruns or asset underperformance.ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONSIn Moody's view, environmental risks are not material to IERL's credit profile. While the unregulated utilities and unregulated power is among three sectors (besides coal mining and coal terminals) in Moody's environmental heat map that have "immediate, elevated risk" from climate change considerations, IERL is considered to have low carbon transition risk since it only owns renewable generation assts.Social risks are not material to IERL credit profile. IERL has low social risk and we are unaware of any concern regarding unions, or communities.We view IERL's corporate governance as a moderate risk. According to the management's projections, IERL plans to make dividend distribution based on minimum target cash balances. These risks are partially mitigated by the covenants embedded in the transaction that limit dividend distributions.The stable outlook reflects our view that IERL will maintain stable and visible cash flows that support projected financial metrics. Specifically, we expect that CFO Pre-W/C /debt and the interest coverage ratios will average around 12% and 3.0x, respectively and on a projected basis.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGSWe could upgrade IERL's ratings if the company reduces its debt balances or increases its cash flow generation such that it records CFO pre W/C /debt ratio at or above 17%, RCF/debt ratios at or above 8% and Cash interest coverage ratios at or above 3.0x. Importantly, an upgrade would require Moody's assessment of a stronger credit-profile of IERL's off-takers.We could downgrade IERL's ratings if the company records CFO pre W/C /debt ratio below 11%, RCF/debt below 2.5% or the interest coverage ratio remains below 2.5x on a sustained basis. Moody's assessment of a weaker credit-profile of IERL's off-takers could also trigger a rating downgrade.The principal methodology used in these ratings 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. 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