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Global Credit Research - 08 Sep 2010
Buenos Aires, September 08, 2010 -- Moody's Latin America ("Moody's") assigned a B2/A1.ar ratings to
Edenor's up to USD 300 million proposed notes, with a stable outlook.
The new notes will be offered concurrently with an Exchange Offer;
therefore net proceeds of the new notes will be applied to refinance or
repurchase most of Edenor's outstanding debt (the existent notes).
The B2 and A1.ar ratings reflect Edenor's leading position
as the largest distribution utility in the domestic electricity market
in terms of number of clients and its conservative financial profile as
indicated by its relatively low leverage. Nevertheless, the
ratings anticipate a continuation of volatile pricing and the possibility
of a significant decline in the company's distribution margin due
to the lack of timeliness with respect to cost recovery. Despite
authorized increases in the distribution tariff by the Argentinean regulators
in recent years, the recovery mechanism, more recently,
has not worked as expected. The ratings still reflect the uncertainty
that surrounds Argentina's electric industry due to the lack of transparency
and predictability of the current regulatory framework.
Edenor's B2 rating primarily reflects its expected financial performance
and its regulatory risk profile in accordance with Moody's global rating
methodology for regulated electric and gas utilities. The A1.ar
is a National Scale rating (NSR), and it is intended to measure
the relative creditworthiness among debt issues and issuers within a country,
enabling market participants to better differentiate between relative
risks. NSRs in Argentina are designated by the ".ar" suffix.
NSRs differ from global scale ratings in that they are not globally comparable
to the full universe of Moody's rated entities, but only with other
rated entities within the same country.
Moody's continuing concern with the overall regulatory environment in
Argentina remains a major constraint to the ratings. Edenor's
tariffs and other terms of its concession are subject to regulation by
the Secretariat of Energy and the Argentine National Electricity Regulator
(ENRE). Edenor's regulated tariffs have remained frozen for
several years and while the Argentinean regulators have authorized an
adjustment of the VAD (value added for distribution) in 2007 for Edenor's
non-residential consumers and in 2008 for residential, the
expected cost recovery mechanism (CMM) after those initial adjustments
is not working as anticipated. The absence of a workable cost recovery
mechanism in a context of growing inflation is clearly hurting Edenor's
operating profits. To offset the delays in the CMM, the Energy
Secretariat allowed Edenor to retain funds from the Program for the Rational
Use of Electric Power (PUREE), in order to reimburse the company
for the amounts it is owed under requested CMM increases, which
are not yet reflected in the distribution margin. While this compensation
mechanism may not be sustainable and is less clear and less transparent
than it could have been with the timely application of the CMM as originally
designed, it has allowed Edenor to maintain its cash generation
Edenor's proposed notes are dollar denominated while revenues are
in the local currency and will be therefore exposed to devaluation risk.
Furthermore, Edenor has no hedging policy in place. Historically,
Edenor has only hedged its upcoming interest payments but not principal.
In spite of declining margins, Moody's sees Edenor's
credit metric and cash flow metrics to be supportive of current ratings.
Leverage ratios have increased slightly to 2.4x from 2.2x
at fiscal year-end due to a combination of declining EBITDA and
the effect of the peso devaluation on Edenor's dollar denominated
debt. The EBITDA decline reflects the lack of any CMM adjustment
to tariffs resulting in lower margins in 2009 on similar revenues in the
previous year, a trend that has persisted in 2010. Nevertheless,
cash flow metrics in relation to debt remain at 2008 levels, or
are even higher, as a consequence of the PUREE compensation mechanism.
Cash flow from operations pre- working capital changes (CFO Pre
W/C) + interest to interest expense stood at 6.0x while CFO
Pre-W/C to debt improved to 70% at year-end 2009
(73% as of June 2010) from 50% in 2008 due to amounts being
collected by the company through the compensation mechanism. As
of June 30 2010, the amount retained from the PUREE amounted to
ARS 369 million (approximately USD 95 million).
Moody's views Edenor's liquidity as adequate. The issuance
of the new notes in combination with the exchange offer will further enhance
Edenor's relatively strong liquidity position. The new notes
will have 12 years tenor and proceeds will be used to redeem 2017 USD
notes and most of the remaining outstanding debt, giving the company
enough financial flexibility for the foreseeable future.
The stable outlook reflects Moody's expectation that the company will
be able to reasonably maintain its current financial profile. The
stable outlook also considers that Edenor will continue to post strong
internal cash flow generation in spite of declining operating margins.
Ratings could come under upward pressure if the evolution of the current
regulatory framework leads to a more stable and predictable regulatory
environment. Evidence of a more consistent application of the CMM
mechanism for the recovery of increased costs could also add upward pressure
on the ratings.
In addition, the implementation of a more conservative financial
policy by the company that further reduces leverage leading to a debt
to EBITDA ratio of less than 1.5 times on a sustainable basis along
with a material change in debt currency denomination that would reduce
dollar exposure by at least 50% could also have a positive impact
If the current regulatory environment deteriorates further, such
that Edenor becomes unable to retain the cash amounts collected under
the PUREE on its balance sheet while the CMM is not applied and/or the
company's financial position returns to the levels registered in the 2004-2005
period, or where the CFO Pre W/C plus Interest to Interest were
to fall below three times or CFO Pre W/C to Debt were to drop below 20%,
the ratings could come under pressure. To that end, continuation
of the rate freeze and failure to implement any aspect of the CMM recover
mechanism could negative impact ratings for the Argentinean utilities.
Since Edenor's revenues are in local currency and its bonds are dollar-denominated,
its financial profile could be substantially and adversely affected by
a major devaluation of the Argentine peso.
Empresa Distribuidora Norte S.A (Edenor), headquartered in
Buenos Aires, Argentina, is the country's largest electricity
distribution company. As of June 2010, Edenor had 2.6
million clients and reported total revenues of ARS 2.1 billion
(approximately USD 540 million).
Information sources used to prepare the credit rating are the following:
parties involved in the ratings, public information, confidential
and proprietary Moody's Investors Service's information.
Moody's considers the quality of information available on the issuer
or obligation satisfactory for the purposes of maintaining a credit rating.
MOODY'S adopts all necessary measures so that the information it uses
in assigning a credit 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.
Please see ratings tab on the issuer/entity page on Moodys.com
for the last rating action and the rating history.
The date on which some Credit Ratings were first released goes back to
a time before Moody's Investors Service's Credit Ratings were fully digitized
and accurate data may not be available. Consequently, Moody's
Investors Service 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 the Credit Policy page on Moodys.com for the methodologies
used in determining ratings, further information on the meaning
of each rating category and the definition of default and recovery.
Vice President - Senior Analyst
Infrastructure Finance Group
Senior Vice President
Infrastructure Finance Group
Moody's Investors Service
Moody's Latin America, Calificadora de Riesgo
Moody's assigns B2/A1.ar ratings to Edenor's USD 300 m proposed notes; Outlook stable
Cerrito 1186, 11th fl
Buenos Aires C1010AAX
No Related Data.
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