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Global Credit Research - 05 Nov 2010
Buenos Aires, November 05, 2010 -- Moody's Latin America assigned a B3/Baa1.ar rating to Emgasud's
USD 160 million proposed notes. The rating outlook for Emgasud
The B3/Baa1.ar ratings take into consideration Emgasud's
recent poor performance due to delays in the full implementation of its
ED ("Energía Distribuida") project, the challenges
of a relatively new and untested regulatory framework and the concentration
of its operations in only the Argentinean market that has been highly
unpredictable in recent years.
The ratings also consider the outstanding prospects for wind generation
in Argentina. Although challenging for a company that has no previous
experience with this technology, the successful implementation of
the Rawson wind project will provide Emgasud with diversification in terms
of fuel as well as an additional degree of cash flow predictability.
To develop the wind farm, Emgasud relies on a appropriate location
to produce wind energy, a long term contract to sell the energy,
and a proven technology from its equipment supplier, who will also
be the project operator for the life of the bonds.
The B3/Baa1.ar ratings considers the various payment mechanisms
and structural features that are available for debt repayment, which
we collectively view as favorable to the assigned ratings. Most
of Emgasud's outstanding and new debt is payable from direct transfers
to a trustee arising from collections under the Res. 220 ED contracts.
In spite of initial delays in this project, construction delays
and costs overruns, ED is now almost fully operational, providing
Emgasud with a reasonable level of future cash flow predictability under
different generation and dispatch scenarios. In addition,
assuming project completion of the Rawson wind project, debt repayment
will also be secured by payments under the off-take contract with
Cammesa, that will have a fixed price per MWh for a 15 year period.
Also, Cammesa will transfer an additional 5% of its monthly
payment to EMGASUD to fund a reserve account. Further, the
notes will be partially guaranteed by a pledge of certain Emgasud's
turbines and by a guarantee from the national government.
Moody's observes that the "ED" contracts have an average
maturity of three years (which we believe are likely to be renewed for
a similar period) and that the wind project contracts have a fifteen term,
which together should provide some cash flow predictability. However,
we also observe that in both cases, the off-taker is Cammesa,
an agency that administers the wholesale electricity market in Argentina.
Cammesa's administration of the wholesale electricity market includes
the operation of the system as well as being responsible for collections
and payments. As the electric price paid by consumers is not sufficient
to cover its production costs and subsequent payments to producers,
Cammesa faces an ongoing operating deficit that is currently financed
with government resources. As such, we believe that rating
on EMGASUD should be closely aligned with the rating assigned to the Argentine
government (B3, Stable).
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."
Proceeds from the notes will be used to prepay outstanding notes and to
complete the financing of a new wind farm project in Rawson, in
the Province of Chubut, Argentina.
The notes will be issued in two tranches: Class 2 up to USD 81.9
million and Class 3 up to USD 84.6 million which jointly will aggregate
up to a maximum amount of USD 160 million. Class 2 cash proceeds
will be applied to refinance Class 1 notes outstanding (as of September
30th, USD 80 million) while Class 3 cash proceeds will be used to
finance the Rawson wind project. During the construction period
and to mitigate the risks of potential delays in the construction or the
commencement of the wind project's commercial operations,
EMGASUD's collections from its previous "Energía Distribuida"
("ED") project will be available for debt repayment.
After the project is completed and commercial operation begin, collections
from the wind project will also be dedicated to repay the notes.
Collections will be assigned to a guaranty trust, managed by Deutsche
Bank S.A. ("Deutsche"; rated TQ1.ar)
acting as a trustee for the benefit of bondholders. Deutsche will
apply the collections under the off-take contracts to make payments
under the notes.
The stable outlook incorporates Emgasud's predictable cash flows
after "ED" full completion under different generation scenarios
as well as its expected improved financial performance over its recent
The ratings could be downgraded if payments under "ED" from
Cammesa experience a significant delay or if Emgasud incurs unexpected
delays or costs overruns in the construction of its new wind project.
Also, if Emgasud´s expansion program or financial policy become
more aggressive than expected such that Debt to EBITDA exceeds 5.0x
or retained cash flow to Debt is lower than 15%, the ratings
could come under downward pressure.
Given the challenges and the inherent execution risks posed by Emgasud's
new wind development as well as the company's recent poor performance,
an upgrade is not likely in the near term. However over the medium
term, assuming that ED continues to generate stable cash flow and
when operational, should the wind project produce energy in line
with our current expectations the ratings could experience some upward
Emgasud S.A., headquartered in the province of Buenos
Aires, Argentina, initiated operations in 1991, in the
gas distribution business. It also operates in gas transportation
but since 2008 power generation is its main business, representing
more than 80% of total revenues. As of June 2010,
Emgasud reported total revenues of ARS 221 million (approximately USD
Information sources used to prepare the credit rating are the following:
parties involved in the ratings, parties not involved in the ratings,
public information, and confidential and proprietary Moody's
Investors Service information.
Moody's Investors Service considers the quality of information available
on the issuer or obligation satisfactory for the purposes of assigning
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 B3/Baa1.ar ratings to EMGASUD's USD 160 million proposed notes; Outlook stable
Cerrito 1186, 11th fl
Buenos Aires C1010AAX
No Related Data.
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