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Rating Action:

Moody's Upgrades AES Corporation's Corporate Family Rating to Ba1 from Ba2; Rating Outlook is Stable

18 Jun 2018

Approximately $3.8 billion of consolidated debt securities affected

New York, June 18, 2018 -- Moody's Investors Service ("Moody's") today upgraded the ratings of The AES Corporation (AES) including the Corporate Family Rating (CFR) to Ba1 from Ba2 and the Probability of Default Rating to Ba1-PD from Ba2-PD. In addition, Moody's upgraded AES' senior unsecured ratings to Ba1 from Ba2 and its senior secured credit facility to Baa3 from Ba1. AES' speculative grade liquidity rating is affirmed at SGL-2. The rating outlook is stable.

RATINGS RATIONALE

"AES continues to exhibit improvement in its credit profile", said Natividad Martel, Moody's Vice-President Senior Analyst. "Financial ratios are getting stronger, the contracted nature of cash flows is growing, the company exhibits superior business diversity and it is steadily reducing its exposure to carbon risks."

The upgrade to Ba1 reflects AES' cash flow diversity across its large portfolio of regulated or contracted assets, and an expectation for new projects becoming operational over the next few years. These new projects are expected to lengthen the contracted nature of AES' portfolio.

AES also continues to take steps to de-risk its businesses and improve its financial profile, including ongoing cost savings programs, interest expense savings and deleveraging initiatives at several of AES' existing subsidiaries.

Moody's expects AES will exhibit a more material improvement in its parent only credit metrics, driven by the incremental dividends from new subsidiaries along with the recent reduction of holding company debt by over $800 million in March 2018. These include the ratio of parent only cash flows (POCF; defined as dividends received from subsidiaries excluding interest and other parent company expenses) to holding company debt. Moody's calculates a ratio of POCF to holding company debt that approximates 17% by year-end 2018, and around 20% in 2019. At year-end 2017, the ratio was around 14%. That said, from a credit perspective, Moody's focuses on consolidated financial ratios, and AES has generated a ratio of consolidated FFO to consolidated debt of 12% in 2017, and it is expected to rise to the mid-teens range over the next few years.

Importantly, the Ba1 rating also factors in AES' shift in its corporate strategies to be more climate friendly. Moody's sees AES increasing its focus on renewable energy supplies and battery storage technologies while reducing its merchant coal-fired power generation businesses.

The Ba1 CFR is constrained by the remaining construction risk across AES' expansion initiatives. Over the next few years, AES faces the tail-end of its ongoing capital expenditure program, particularly with the completion of the liquefaction natural gas regasification terminal in Panama (expected completion in 2019), the AES Southland repower project (2020) and the AES Gener's recent re-negotiation of the construction contract with Strabag AG (not rated) to build the Alto Maipo hydro-electric facility. In addition, we expect AES' exposure to non-investment grade countries to fall in the next few years, however speculative grade market risk remains (around 36% of the 2016 and 2017 average consolidated EBITDA).

The stable outlook assumes that AES will successfully complete its construction program, continue to implement its business de-risking initiatives, including the exposure to carbon risks and produce a ratio of consolidated FFO to consolidated debt of approximately 12-15% over the next 12 to 18 months.

Liquidity Profile

The speculative grade liquidity rating of SGL-2 reflects good liquidity prospects for the next twelve months based on the expectation that AES will remain free cash flow positive and that AES' subsidiaries will continue to up-stream aggregate dividends in excess of $1 billion. Liquidity will also be benefited by AES' plans for additional cost savings of $100 million this year and reduced interest expense. In 2018, Moody's estimates that AES should generate between $600 million and $675 million, earmarked $250 million in investments in its subsidiaries and almost $350 million for dividend distributions.

The SGL-2 also considers AES' $1.1 billion committed bank credit facilities due in 2020 and 2021 and anticipates that AES will remain in compliance with substantial headroom for its two financial covenant requirements: a minimum parent operating cash flow coverage ratio and a maximum level of recourse debt relative to cash flow ratio. End of March 2018, AES' borrowings under its credit facility approximated $300 million (2017: $207 million).

The SGL-2 also anticipates that AES will use available cash to reduce the borrowings under this facility. This available cash will include the net proceeds of around $310 million from the recently announced sale of its 17% stake in the Brazilian utility Eletropaulo Met.Elet de Sao Paulo (Ba2 stable) for over $300 million. This follows the over $800 million net debt reduction funded by the $1 billion sale of its Philippine assets earlier this year. AES does not have any major debt maturities until 2021 when $500 million 4% Notes become due in March 2021.

Upgrades:

..Issuer: AES Corporation, (The)

.... Probability of Default Rating, Upgraded to Ba1-PD from Ba2-PD

.... Corporate Family Rating, Upgraded to Ba1 from Ba2

....Senior Secured Bank Credit Facility, Upgraded to Baa3(LGD3) from Ba1(LGD2)

....Senior Unsecured Regular Bonds/Debentures, Upgraded to Ba1(LGD4) from Ba2(LGD4)

Affirmations:

..Issuer: AES Corporation, (The)

.... Speculative Grade Liquidity Rating, Affirmed SGL-2

Outlook Actions:

..Issuer: AES Corporation, (The)

....Outlook, Changed To Stable From Positive

What Could Change the Rating - Up

AES' ratings could be upgraded if there is an improvement in the consolidated financial profile, where the ratio of consolidated FFO to consolidated debt reaches at least 16% on a sustained basis. These metrics thresholds benefit from AES' diversification and contracted cash flows relative to the Ba-rating category under the Unregulated Utilities and Unregulated Power Companies Methodology. A ratings upgrade will also require maintaining very good liquidity and maintaining financial policies consistent with an investment grade rating.

What Could Change the Rating - Down

A downgrade could occur if AES adopted a more risky business strategy or more aggressive financial policies; if consolidated leverage ratios increased, or if a more contentious regulatory environment emerged in any of AES' key subsidiary jurisdictions (such as Indiana). Ratings could also be downgraded if the ratio of consolidated FFO to consolidated debt fell below the 12%-range for a sustained period of time.

The principal methodology used in these ratings was Unregulated Utilities and Unregulated Power Companies published in May 2017. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

AES is a globally diversified power holding company that owns a portfolio of electricity generation and distribution businesses in fifteen countries. In total, AES has ownership interests in approximately 35,000 MW of generating capacity across the globe and serves retail customers via its distribution subsidiaries in two countries.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain 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 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.

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 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

Jim Hempstead
MD - Utilities
Infrastructure Finance 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

No Related Data.
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