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Rating Action:

Moody's Assigns Baa3/Aaa.br First-time Ratings to State Grid Brazil Holding

 The document has been translated in other languages

09 Sep 2019

Sao Paulo, September 09, 2019 -- Moody's América Latina Ltda., ("Moody's") has assigned Corporate Family Ratings (CFRs) of Baa3 on the global scale and Aaa.br on the national scale to State Grid Brazil Holding S.A. (SGBH). The outlook on the ratings is stable. This is the first time that Moody's has assigned ratings to SGBH.

RATINGS RATIONALE

The Baa3/Aaa.br ratings assigned to SGBH take into consideration the company's predictable cash flows steaming from its portfolio of long-term power transmission concessions in Brazil that are remunerated with availability based payments, thus insulated from volume risk. The ratings also consider SGBH's significant scale, as Brazil's second largest private transmission company, operating a diversified portfolio of assets that are strategically important to sustain country's interconnected system reliability.

The Baa3 global scale rating incorporates one notch uplift from SGBH's standalone credit profile, reflecting Moody's assessment of the likelihood of continued support from its controlling shareholder State Grid International Development Limited (SGID, A2 stable). This is based on our view of the strong strategic alignment between the non-domestic parent and the Brazilian operations, which is demonstrated by the company sharing of the parent's brand name, the technology transfers for greenfield projects and track record of explicit financial support, evidenced through capital contributions of about BRL7.3 billion since 2014 and intercompany loans amounting to approximately BRL4 billion by the end of 2018. We also note structural incentives for the controlling shareholder to maintain support for the company in case of financial distress given cross-default clauses at existing SGID's guaranteed bond indentures related to bankruptcy of any subsidiary where SGID holds more than 50% interest.

Tempering SGBH's credit profile are: (i) the currently high leverage evidenced by a consolidated Net Debt to EBITDA of 8.4x, in December 2018 (calculated as per Moody's standards, considering the intercompany loans as debt and excluding construction margins), and (ii) its exposure to foreign-currency rate volatility, because 43% of its financial liabilities are related to intercompany loans denominated in US dollars without hedging. Mitigating those risks are (i) the material improvement in cash flows expected for the 2019/2020 cycle with the completion of large projects under construction, which will support net leverage reduction, and (ii) the company's flexibility to defer payments under the intercompany loans, if needed, provided the terms and conditions of the loan agreements with the parent.

Xingu Rio Transmissora de Energia S.A. (XRTE) is SGBH's largest concession, representing around 45% of the company's total permitted annual revenues for the 2019/2020 cycle. In final phase of construction, the project comprises an ultrahigh-voltage continuous current transmission line of 800 kV with more than 2,500 kilometers of extension, the longest in the country, connecting the power generation facilities in the North of the Brazil to the consumers in the Southeast. On August 22, XRTE delivered for commercial operation the second bipole at the Belo Monte hydro power plant, adding transmission capacity to dispatch 4,000 megawatt, 100 days earlier than the contractual deadline.

Despite SGBH's reliance on the local banking and debt market to finance of its operations, most of its remaining funding needs have already been contracted under long-term project finance structures mitigating refinancing risks over the intermediate term, which helps the company to achieve a higher degree of de-linkage from the Brazil's sovereign's country risk. On the other hand, SGBH's earnings are fully generated domestically, thus the parent may be less willing to provide further support to its subsidiary in an event of a severe distress crisis precipitated by a sovereign default. Thus, SGBH's credit quality is somewhat constrained by that of the Brazil's sovereign.

The stable outlook assumes the company will reduce net leverage within the next 12 to 18 months benefited by increased cash flows, as new projects become operating available, contributing to improvement in credit metrics, such as the net debt to EBITDA ratio approaching 4.5x, as per Moody's standard adjustments. The stable outlook also assumes the company will continue to pursue growth opportunities in Brazil and Latin America, but will maintain a conservative approach towards new investments and a balanced pace of dividend distributions to shareholders, without significant impact to its consolidated investment grade credit profile.

WHAT COULD CHANGE THE RATING UP/DOWN

Positive rating pressure on the ratings would increase with a material improvement in SGBH's standalone credit profile, as demonstrated by a Funds from Operations (FFO)-to-net debt ratio that is consistently above 20% (14.5% on a 3-year average as of December 31 2018) and a Retained Cash Flow (RCF)-to-net debt ratio that is above 15% (14.5% on a 3-year average as of December 31 2018) on a consolidated and sustainable basis. A rating upgrade would also require an upgrade of the Government of Brazil (Ba2, stable).

The ratings could be downgraded upon a similar rating action on Brazil's sovereign rating or Moody's perception of lower likelihood of parental support from SGID. Downward rating pressure would also develop should the SGBH engage in additional greenfield projects through aggressive bids or debt-funded acquisitions that result in a capital structure that compromises its consolidated credit metrics, such that its FFO-to-net debt ratio declining below 10% and its RCF-to-net Debt ratio below 5% for a prolonged period.

COMPANY PROFILE

State Grid Brazil Holding S.A. (SGBH) is a pure holding company, ultimately controlled by State Grid Corporation of China (SGCC, A1 stable) and indirectly through State Grid International Development Limited (SGID, A2 stable), that is focused on power transmission services. Created in 2010, SGBH is currently the second-largest private power transmission company in Brazil in terms of transmission lines extension, controlling, operating and maintaining about 9,742 kilometers (km) of high voltage transmission lines and 66 substations, through 18 long-term concessions held as separate special purpose entities. The company also participates in the equity capital of five transmission concessions in partnership with other electricity companies, comprising another 6,012 km of operating transmission lines and eight substations. In December 2018, SGBH reported net revenues (excluding construction revenues) of BRL990 million and EBITDA of BRL752 million.

RATING METHODOLOGY

The principal methodology used in these ratings was Regulated Electric and Gas Networks published in March 2017. Please see the Rating Methodologies page on www.moodys.com.br for a copy of this methodology.

Moody's National Scale Credit Ratings (NSRs) are intended as relative measures of creditworthiness among debt issues and issuers within a country, enabling market participants to better differentiate relative risks. NSRs differ from Moody's global scale credit ratings in that they are not globally comparable with the full universe of Moody's rated entities, but only with NSRs for other rated debt issues and issuers within the same country. NSRs are designated by a ".nn" country modifier signifying the relevant country, as in ".za" for South Africa. For further information on Moody's approach to national scale credit ratings, please refer to Moody's Credit rating Methodology published in May 2016 entitled "Mapping National Scale Ratings from Global Scale Ratings". While NSRs have no inherent absolute meaning in terms of default risk or expected loss, a historical probability of default consistent with a given NSR can be inferred from the GSR to which it maps back at that particular point in time. For information on the historical default rates associated with different global scale rating categories over different investment horizons, please see http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1174796.

Moody's Corporate Family Ratings (CFRs) are long-term ratings that reflect the relative likelihood of a default on a corporate family's debt and debt-like obligations and the expected financial loss suffered in the event of default. A CFR is assigned to a corporate family as if it had a single class of debt and a single consolidated legal entity structure. A CFR does not reference an obligation or class of debt and thus does not reflect priority of claim. For more information, please see https://www.moodys.com/research/Moodys-Rating-Symbols-Definitions--PBC_79004.

REGULATORY DISCLOSURES

Information sources used to prepare the rating are the following: parties involved in the ratings, public information, and confidential and proprietary Moody's information.

Information types used to prepare the rating are the following: financial data, economic and demographic data, debt documentations, operating data, historical performance data, public information, Moody's information and regulatory fillings.

Sources of Public Information: Moody's considers public information from many third party sources as part of the rating process. These sources may include, but are not limited to, the list available in the link http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1188605

Moody's considers the quality of information available on the rated entity, obligation or credit satisfactory for the purposes of issuing a rating.

Moody's adopts all necessary measures so that the information it uses in assigning a 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.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

Please see the ratings disclosure page on www.moodys.com.br for general disclosure on potential conflicts of interests.

Moody's America Latina Ltda. may have provided Other Permissible Service(s) to the rated entity or its related third parties within the 12 months preceding the credit rating action. Please go to the report "Ancillary or Other Permissible Services Provided to Entities Rated by Moody's America Latina Ltda." in the link http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1192148 for detailed information.

Entities rated by Moody's America Latina Ltda. and the rated entities' related parties may also receive products/services provided by parties related to Moody's America Latina Ltda. engaging in credit ratings activities within the 12 months preceding the credit rating action. Please go to the link http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1192146 for a list of entities receiving products/services from these related entities and the products/services received.

Moody's ratings are constantly monitored, unless designated as point-in-time ratings in the initial press release. All Moody's ratings are reviewed at least once during every 12-month period.

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.br.

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.

Please see ratings tab on the issuer/entity page on www.moodys.com.br 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.br for further information.

Please see Moody's Rating Symbols and Definitions on the Ratings Definitions page on www.moodys.com.br for further information on the meaning of each rating category and the definition of default and recovery.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com.br 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.br for additional regulatory disclosures for each credit rating.

Cristiane Spercel
Vice President - Senior Analyst
Infrastructure Finance Group
Moody's America Latina Ltda.
Avenida Nacoes Unidas, 12.551
16th Floor, Room 1601
Sao Paulo, SP 04578-903
Brazil
JOURNALISTS: 0 800 891 2518
Client Service: 1 212 553 1653

Michael J. Mulvaney
MD - Project Finance
Project Finance Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's America Latina Ltda.
Avenida Nacoes Unidas, 12.551
16th Floor, Room 1601
Sao Paulo, SP 04578-903
Brazil
JOURNALISTS: 0 800 891 2518
Client Service: 1 212 553 1653

No Related Data.
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