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Rating Action:

Moody's affirms PSALM's Baa2 ratings; outlook stable

31 Mar 2016

Hong Kong, March 31, 2016 -- Moody's Investors Service has affirmed Power Sector Assets and Liabilities Management Corporation's (PSALM) Baa2 issuer and backed senior unsecured bond ratings.

The outlooks for the ratings are stable.

At the same time, Moody's has lowered PSALM's Baseline Credit Assessments (BCA) to b1 from ba3.

RATINGS RATIONALE

"The rating affirmation reflects PSALM's strategic importance as a state-owned entity which carries out a mandated policy role for the Philippine power sector and the government's strong commitment to the company," says Mic Kang, a Moody's Vice President and Senior Analyst.

PSALM's policy role is to restructure and reform the power sector through the privatization of the power assets transferred from National Power Corporation (NPC, Baa2 stable) and the repayment of the NPC debt and obligations assumed by PSALM.

In addition, the Philippine government (Baa2 stable) unconditionally and irrevocably guarantees most of PSALM's debt and obligations and is obligated to assume any remaining assets and liabilities at the end of PSALM's 25-year corporate life, according to the Electric Power Industry Reform Act.

As such, Moody's believes the government's very high support for PSALM, if and when needed, will remain intact, and PSALM's close relationship with the government and governmental support will remain the company's primary rating driver.

The lower BCA reflects Moody's expectation that PSALM's credit metrics will weaken over the next 12-18 months.

In this context, Moody's expects funds from operations (FFO)/debt and FFO/interest coverage to weaken to 3%-5% over the next 12-18 months from 6%-13% in 2013-14 and 1.5x-2.0x from 2.3x-4.3x, respectively, mainly due to the expected reduction in cash inflows from asset sales relating to the power plants transferred from NPC.

Moody's notes that the proceeds from asset sales were minimal in 2015 and will likely remain low over the next 12-18 months, given volatile capital market conditions and the fact that PSALM has already privatized the majority of its power assets.

In addition, Moody's estimates that PSALM's cash on hand of PHP56.5 billion as of 31 December 2014 had largely decreased in 2015 and will fall further in 2016 and thereafter. The likely reduction in cash on hand will weaken PSALM's buffer against its high level of debt leverage. Having said that, we expect PSALM to maintain solid access to credit markets given its strategic importance and high linkage with the government.

The stable ratings outlook is in line with the stable outlook for the Philippine sovereign rating, and reflects Moody's expectation that PSALM's strategic importance to and strong support from the government, if and when needed, will remain intact over at least the next 12-18 months.

An upgrade of the sovereign rating could result in an upgrade of PSALM's ratings, given PSALM's close linkage with the government and the government's strong commitment.

PSALM's BCA could come under upward trend if FFO/debt or FFO/interest exceeds 6%-8% or 2.0x-2.5x on a sustained basis.

Likewise, a downgrade of the sovereign rating could trigger a downgrade of PSALM's ratings.

In addition, any change in PSALM's policy role or indication of a weakening of the government's support could pressure its issuer rating.

PSALM's BCA and the rating could come under downward pressure if FFO/debt or FFO/interest falls below 2%-3% or 1.5x on a sustained basis.

The methodologies used in these ratings were Regulated Electric and Gas Utilities published in December 2013, and Government-Related Issuers published in October 2014. Please see the Ratings Methodologies page on www.moodys.com for a copy of these methodologies.

Power Sector Asset & Liabilities Management Corporation (PSALM), wholly owned and controlled by the Philippine government, was established in 2001 to take ownership of, and manage, all the generation-related assets, liabilities, contracts with independent power producers, real estate and other disposable assets of NPC, including National Transmission Corporation, and to privatize and sell these assets to liquidate NPC's financial obligations.

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.

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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.

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The first name below is the lead rating analyst for this Credit Rating and the last name below is the person primarily responsible for approving this Credit Rating.

Mic Kang
Vice President - Senior Analyst
Project & Infrastructure Finance
Moody's Investors Service Hong Kong Ltd.
24/F One Pacific Place
88 Queensway
Hong Kong
China (Hong Kong S.A.R.)
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (852) 3551-3077

Terry Fanous
MD-Public, Proj & Infstr Fin
Project & Infrastructure Finance
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (852) 3551-3077

Releasing Office:
Moody's Investors Service Hong Kong Ltd.
24/F One Pacific Place
88 Queensway
Hong Kong
China (Hong Kong S.A.R.)
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (852) 3551-3077

Moody's affirms PSALM's Baa2 ratings; outlook stable
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