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Announcement:

Moody's assigns B2/A1.ar ratings to Edenor's USD 70 m notes; Outlook stable

 The document has been translated in other languages

01 Apr 2011

Buenos Aires, April 01, 2011 -- Moody's Latin America assigned B2/A1.ar ratings to Edenor's up to USD 70 million proposed notes, with a stable outlook. The notes are being offered under the 2022 bond offering and to complete the USD 300 million originally announced.

Proceeds from the notes will be used to refinance the bridge loans the company was granted to finance its recently acquired subsidiaries from AIE.

Rating Rationale

On March 4th. Edenor announced it had acquired from AIE the distribution assets it had in Argentina. Those assets comprised EMDERSA, a holding company that owns three different concessions: Edesal, Edelar and Edesa (distribution companies in the provinces of San Luis, La Rioja and Salta) plus an additional one, Eden, which has operations in the northern area of the Buenos Aires Province. Total purchase price was USD 140 million (USD 90 million corresponding to Emdersa and USD 50 million to Eden). While Edenor used cash on hand to pay for the acquisition, it at the same time entered into several short term bank loans for a total amount of ARS 280 (USD 70 million) to refinance the existing debt at the acquired subsidiaries through an intercompany financing from Edenor. Proceeds of the notes will be used to repay Edenor's inter-company loans.

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.

While the recent acquisitions will further strengthen Edenor's position as the country's largest electric utility, the acquired companies should enhance Edenor's margins and EBITDA without increasing leverage substantially. It is anticipated that the acquired subsidiaries will continue to run their own operations.

Nevertheless, 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. In addition, Moody's expects a continuation of volatile pricing and significant declines in distribution margins due to frozen tariffs or the lack of timeliness with respect to cost recovery.

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 climate 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 capacity.

In respect to the recently acquired companies, all of them are regulated by provincial regulatory agencies which have proven to be more proactive in terms of tariff adjustment and more supportive of utilities than the federal regulators, which is a strong credit positive. Nevertheless, the overall regulatory environment in Argentina still lacks the necessary transparency and predictability to be considered supportive although provincial regulation is clearly viewed as being less risky than federal regulation.

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 and our expectation is that the company will continue hedging interest.

Moody's National Scale 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 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 ".ar" for Argentina. For further information on Moody's approach to national scale ratings, please refer to Moody's Rating Implementation Guidance published in August 2010 entitled "Mapping Moody's National Scale Ratings to Global Scale Ratings."

The stable outlook reflects Moody's expectation that the company will be able to efficiently manage the integration of the acquired companies while reasonably maintaining a prudent 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 federal 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 on ratings.

If the current regulatory environment deteriorates further, such that Edenor or its controlled subsidiaries become unable to retain the cash amounts collected under the PUREE on its balance sheet while the CMM is not applied 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 downward pressure. To that end, continuation of the tariff freeze and failure to implement any aspect of the CMM recovery mechanism could negatively 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 December 2010, Edenor had 2.6 million clients and reported total revenues of ARS 2.1 billion (approximately USD 525 million).

Buenos Aires
Daniela Cuan
Senior Analyst
Infrastructure Finance Group
Moody's Latin America, Calificadora de Riesgo
JOURNALISTS: (800) 666 -3506
SUBSCRIBERS: (5411) 4816-2332

New York
William L. Hess
MD - Utilities
Infrastructure Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's Latin America, Calificadora de Riesgo
Cerrito 1186, 11th fl
Buenos Aires C1010AAX
Argentina
JOURNALISTS: (800) 666 -3506
SUBSCRIBERS: (5411) 4816-2332

Moody's assigns B2/A1.ar ratings to Edenor's USD 70 m notes; Outlook stable
No Related Data.
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