Rating Action: Moody's changes Edenor's outlook to negative; affirms Pampa's ratings
Global Credit Research - 31 Dec 2020
New York, December 31, 2020 -- Moody's Investors Service, ("Moody's") today changed Empresa Distribuidora y Comercializadora Norte S.A. (Edenor)´s rating outlook to negative from stable and affirmed its Caa3 corporate family and senior unsecured ratings. At the same time Moody´s also affirmed Pampa Energía S.A. (Pampa) Caa3 corporate family and senior unsecured ratings, with a stable outlook.
The action follows Pampa's announcement of the sale of its controlling interest in Edenor to Empresa de Energía del Cono Sur S.A. (unrated).
The transaction cash price was set at $ 95 million and Pampa will receive $5 million cash seven days after the announcement of the transaction; $50 million at the closing date and $ 40 million at the first anniversary of the closing plus a payment in kind of 21,876,856 Class B shares, representing 2.41% of the capital stock and voting rights of Edenor. The transaction is subject to regulatory approval and Pampa's shareholders approval.
Pending Pampa's shareholders meeting and regulatory approvals, the transaction will trigger a change of control (CoC) offer to Edenor's bondholders that will require the repurchase of the total outstanding of the notes ($ 98 million). While Edenor's cash position (ARS 9 billion as of September or the equivalent to USD 105 million) could allow for the cash payment of the notes, the current Central Bank restrictions on access to foreign currency could complicate or inhibit timely execution of the change of control repurchase. This risk along with the uncertainties on how the CoC offer will be handled by the new owners are reflected in the revision of Edenor's rating outlook to negative.
The negative outlook for Edenor also incorporates the potential for a protracted period of weak cash flow generation resulting from the regulator's extension until at least March 2021 of the tariff freeze and the government's recent announcement to initiate a tariff review process during next year that could result in an extended period of frozen tariffs.
Pampa's ratings affirmation and stable outlook takes into consideration that while Pampa's size, footprint and revenues will be significantly reduced after the sale of Edenor, it will continue to benefit from the revenues and profits of its other businesses that have proven to be more stable than those provided by Edenor. While Edenor's revenues represent a significant portion of the companies' consolidated sales, profits and cash flows provided by EDENOR have been declining and are not expected to improve until an electric distribution tariff regime that compensates for its increased costs is in place. The recent increase in gas prices granted under the last Plan Gas implemented by the government will further enhance Pampa's cash flows and profits from other businesses. In addition, Pampa's senior unsecured notes were issued under Pampa's restricted group (Pampa RG), that is, excluding Edenor and other affiliates where Pampa does not have control and therefore Edenor's sale will not change the sources of cash for debt repayment.
Pampa's Caa3 ratings and stable outlook continue to reflect the strong credit linkages and the exposure the company has to Argentina's regulations and operating environment. Pampa's stable outlook also anticipates that the company will be able to sustain its cash generation capacity and low leverage, with a ratio of CFO (pre WC) to debt in the range of 15-20% and debt to EBITDA below 3.5 times.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Given Edenor's negative outlook, a rating upgrade is unlikely.
A ratings stabilization for Edenor would require that the company is able to improve its free cash flow generation and timely meet all obligations related to its existing debt, particularly considering the events that will be triggered by the proposed transaction.
Increased visibility on the company's tariff regime going forward would be an important consideration for a ratings stabilization.
Considering the current constraining factors, a rating upgrade for Pampa is unlikely in the short term. However, an upgrade of the sovereign coupled with improved operating conditions in the power and energy sectors could create positive rating pressure.
Further deterioration in the operating environment or a significant negative shift in policies or regulations for the companies in the power and energy sectors will likely result in negative pressures on Pampa's ratings.
Empresa Distribuidora y Comercializadora Norte S.A (Edenor), headquartered in Buenos Aires, Argentina, is the country's largest electricity distribution company covering a major portion of Buenos Aires and its northern suburbs, serving about 3.1 million clients and supplying approximately 20% of the country's total electricity consumption. Under the terms of Edenor's concession, it has the monopoly to distribute electricity within its license area and enjoys the strongest market position within the country in terms of number of clients and electricity consumption.
Pampa Energia S.A. (Pampa) is an integrated energy company in Argentina, engaged in the generation, distribution and transmission of electric power, as well as in E&P, and petrochemicals and hydrocarbon commercialization and transportation. Since 2018, when Pampa started divesting its oil business, its focus was reoriented to the expansion of its power generation, to the production of natural gas, mainly development and exploitation of unconventional gas reserves (mostly tight gas). For the 12 months that ended September 2020, more than 70% of its EBITDA was generated by power generation and gas production.
The principal methodology used in rating Empresa Distribuidora y Com. Norte S.A. was Regulated Electric and Gas Utilities published in June 2017 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1072530. The principal methodology used in rating Pampa Energia S.A. 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 these methodologies.
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.
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These ratings are 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.
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