Approximately US$250 million of debt securities affected
New York, October 31, 2011 -- Moody's Investors Service assigned a (P)Baa3 foreign currency senior unsecured
rating to Costa Rican's Instituto Costarricense de Electricidad
(ICE) proposed issuance of US$250 million senior unsecured notes.
This is the first time Moody's has assigned a rating to ICE.
The rating outlook for ICE is stable.
The net proceeds from this offering will be largely applied to prepay
outstanding indebtedness, including ICE's US$210 million
senior unsecured credit facility (Bridge Facility) executed with Citibank,
NA, and Deutsche Bank AG maturing in December 2011.
RATINGS RATIONALE
The (P)Baa3 rating reflects ICE's ownership structure and linkages
with the Government of Costa Rica (Baa3, stable). Given it
is fully owned by the Costa Rican government, it falls under the
scope of Moody's rating methodology for government-related issuers
(GRIs). The (P)Baa3 rating reflects Moody's assessment of a high-level
probability of extraordinary support from the government and a high level
of dependence, which reflects the degree to which Costa Rica is
exposed to the same risks as those that would affect credit quality at
ICE. ICE's BCA, which is a representation of the group's
intrinsic creditworthiness before taking into account possible extraordinary
support from the sovereign is 13 (maps to Ba3), based on a scale
of 1-21 in which 1 indicates the highest credit quality (Aaa).
"ICE's BCA reflects its dominant market position in the Costa
Rican electricity sector as the largest vertically integrated utility
and the fully regulated nature of these operations" said Natividad
Martel, Assistant Vice President at Moody's. "It
also factors in ICE's role as an autonomous government entity established
to develop the country's natural resources to provide electricity
and telecommunication services. These intrinsic strengths are balanced
by some reliance on the mobile business that will shortly start experiencing
intense competitive challenges, as well the issuer's exposure
to foreign exchange risk, and certain governance weaknesses."
The ratings consider ICE's constructive relationship with the regulatory
body for public services, ARESEP, and our belief that the
regulatory framework has demonstrated some predictability and transparency
given the track record of relatively smooth electricity tariff reviews
since implementation in the late 1990s. On a less positive note,
the BCA considers the relatively low allowed rates of return on ICE's
asset base when compared to other global utilities as well as some delays
in ICE's recovery of variable costs, particularly for fuel
expenses. In the past, particularly during 2008, the
delay in recovery of variable costs negatively impacted ICE's financial
performance as the severe drought required more frequent dispatch of higher
cost thermal-fired facilities. That said, we acknowledge
ARESEP's initiative earlier this year to implement quarterly extraordinary
tariff reviews which should help reduce ICE's recovery lag thereby
enhancing future cash flows.
The BCA is also influenced by the modest size of ICE's operations
and service territory, making it more exposed to storms and other
natural disasters than can impact the region. ICE's leading
position in the telecommunication sector provides some diversification
benefits from a product offering perspective, but will undoubtedly
face strong challenges over the medium term due to the worldwide trend
of declining demand for fixed-landline services and the expectation
that ICE's mobile telecommunication operations will face substantial
competition by year-end. Moody's acknowledges ICE's
incumbent status and the growth potential associated with the country's
relatively low current penetration rate of mobile services compared to
other Latin American markets, but we also anticipate the implementation
of very aggressive competitive strategies from the two international large
carriers approved by the telecommunications regulator, SUTEL,
that will start operating in the Costa Rican mobile market before year-end.
The BCA further factors in the anticipated deterioration in ICE's
key credit metrics, as calculated by Moody's, to finance
an aggressive in-country expansion plan for capital expenditures
in the electricity sector due to growing power demand and to a lesser
extent, in telecommunications, in the wake of the new competition.
ICE's primary mode of financing these capital expenditures is through
operating lease structures where asset ownership can be transferred later
to ICE. Consistent with our standard adjustments for off-balance
items, including operating leases, Moody's has adjusted
ICE's indebtedness to reflect the incurrence of these leases,
increasing consolidated leverage. That said, we observe that
ICE's role to execute national electrification plans and promote
the power industry enhances internal cash flow as income tax payments
and dividend distributions are limited, since net profits are required
to be reinvested into the business. Moody's anticipates ICE's
adjusted credit metrics to remain commensurate within the Ba-rating
category, namely that retained cash flow (RCF) is expected to represent
less than 10% of debt while cash flow (CFO pre-W/C) interest
coverage should approximate 2.0x in most years.
The BCA is further tempered by the company's exposure to foreign
exchange rate risk as the vast majority of its indebtedness has been incurred
in foreign currency, primarily in US$, all of which
is acerbated by ICE's limited ability to hedge this exposure due
to the lack of market depth that exists for Colones.
From a governance perspective, Moody's observes the existence
of a qualified opinion issued for ICE's 2010 financial statements
from its newly appointed auditors, KPMG. The qualified opinion
highlights the auditor's inability to perform sufficient audit procedures
on a few items in the financial statements, such as certain account
receivables, prepaid income and long term liabilities. Moody's
observes that the qualifications are specific and narrowly focus on particular
accounts, and that such amounts are not considered material data
points in determining ICE's overall credit rating. Additionally,
we understand that management is implementing new procedures and systems
intended to address these deficiencies. Also, while not included
as part of the qualification in the auditor's opinion, KPMG
points out that ICE capitalizes approximately Colones 50,323 millions
(around US$100 million) in connection with the El Diquis hydro-electric
project which is currently experiencing delays in its construction.
Moody's believes that a write off of these costs associated with
El Diquis project, if it occurred, would not impact the ICE's
BCA or foreign currency rating.
Moody's also understands that covenant compliance under certain
of its loan agreements may tighten over the next twelve months.
While Moody's fully anticipates the company remaining compliant
with these covenants over the near term, our rating incorporates
an understanding that ICE will seek to modify its covenant package in
order to obtain greater cushion between the current thresholds and expected
future results.
ICE's stable rating outlook reflects the stable outlook on the rating
of the Costa Rican government and our expectation that implied support
or dependence levels from the sovereign will not change. The stable
outlook also reflects our belief that ICE will be able to successfully
manage the increasing leverage associated with its material investment
program and associated liquidity in a way that the credit metrics remain
appropriate for its current BCA rating. The stable rating outlook
further incorporates our expectation that ICE's exposure to foreign
currency risk will not cause major liquidity challenges and that it will
successfully secure greater financial flexibility through the modification
of certain financial covenants.
Since ICE's Baa3 rating is based on Moody's methodology for GRIs,
upward rating pressure is unlikely given the stable rating outlook for
the Costa Rican government and the current BCA for ICE. The BCA
rating of ICE could be upgraded if ICE successfully executes its capital
investment plans or if evidence surfaced of a more credit supportive Costa
Rican regulatory framework which enhances its ability to recover costs
and earn a higher rate of return on rate base on a sustainable basis.
Quantitatively, an upgrade could be triggered if after completion
of the construction of its large generation plants, ICE reports
RCF that represents at least 12% of total debt and cash flow interest
coverage higher than 2.5x on a sustained basis.
The ratings or outlook would come under pressure if there is any downgrade
in the sovereign rating or outlook or in the case of a lower than anticipated
implied sovereign support or a downgrade of the BCA. Negative rating
pressure on the BCA could surface from a deterioration in the credit supportiveness
of the Costa Rican regulatory framework or if ICE's expansion plan
is poorly executed or indebtedness increases significantly above anticipated
levels such that the credit metrics deteriorate and cash flow interest
coverage falls below 2.0x or RCF to debt declines below 6%.
In addition, ratings could be downgraded if the issuer is not able
to successfully secure greater financial flexibility in its loan agreements.
The principal methodologies used in rating ICE are the Moody's "Regulated
Electric and Gas Utilities" and "Global Telecommunications
Industry" rating methodologies published in August 2009 and December
2010, respectively, as well as the "Government Related
Issuers: Methodology Update" published in July 2010.
Headquartered in San Jose, Costa Rica, ICE is a government-owned
vertically integrated electric utility as well as an integrated telecommunications
service provider. ICE is the largest electric utility in Costa
Rica accounting for the vast majority of the country's transmission
assets as well as over 75% of the installed capacity and electricity
generation. The group's market share in the distribution
of power also exceeds 75% after considering ICE's 98.6%
ownership stake in Compañia Nacional Fuerza y Luz that serves the
capital. The group's 2,252.4 megawatt fleet
approximates 77.2% of the country's installed capacity,
and generates about 78% of the power, with the bulk of its
fleet being hydro capacity. ICE's telecommunication operations
include fixed-line and mobile as well as data transmission services.
As of June 30, 2011, ICE reported assets of approximately
US$9.2 billion.
REGULATORY DISCLOSURES
The Global Scale Credit Ratings on this press release that are issued
by one of Moody's affiliates outside the EU are considered EU Qualified
by Extension and therefore available for regulatory use in the EU.
Further information on the EU endorsement status and on the Moody's
office that has issued a particular Credit Rating is available on www.moodys.com.
For ratings issued on a program, series or category/class of debt,
this announcement provides relevant regulatory disclosures in relation
to each rating of a subsequently issued bond or note of the same series
or category/class of debt 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 relevant regulatory disclosures in relation
to the rating action on the support provider and in relation to each particular
rating action for securities that derive their credit ratings from the
support provider's credit rating. For provisional ratings,
this announcement provides relevant 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.
Information sources used to prepare the rating are the following :
parties involved in the ratings, parties not involved in the ratings,public
information, confidential and proprietary Moody's Investors
Service information and confidential and proprietary Moody's Analytics
information.
Moody's considers the quality of information available on the rated
entity, obligation or credit satisfactory for the purposes of issuing
a rating.
Please see the ratings disclosure page on www.moodys.com
for general disclosure on potential conflicts of interests.
Please see the ratings disclosure page on www.moodys.com
for information on (A) MCO's major shareholders (above 5%) and
for (B) further information regarding certain affiliations that may exist
between directors of MCO and rated entities as well as (C) the names of
entities that hold ratings from MIS that have also publicly reported to
the SEC an ownership interest in MCO of more than 5%. A
member of the board of directors of this rated entity may also be a member
of the board of directors of a shareholder of Moody's Corporation;
however, Moody's has not independently verified this matter.
Please see Moody's Rating Symbols and Definitions on the Rating Process
page on www.moodys.com for further information on the meaning
of each rating category and the definition of default and recovery.
Please see ratings tab on the issuer/entity page on www.moodys.com
for the last rating action and the rating history.
The date on which some ratings were first released goes back to a time
before Moody's ratings were fully digitized and accurate data may not
be available. Consequently, Moody's provides a date that
it believes is the most reliable and accurate based on the information
that is available to it. Please see the ratings disclosure page
on our website www.moodys.com for further information.
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.
Natividad Martel
Asst Vice President - Analyst
Infrastructure Finance Group
Moody's Investors Service, Inc.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
A.J. Sabatelle
Senior Vice President
Infrastructure Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Moody's assigns (P)Baa3 rating to ICE's proposed senior unsecured notes
