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Rating Action:

Moody's assigns Ba2 rating to Energuate's senior unsecured guaranteed notes; outlook Stable

18 Apr 2017

Up to US$350 Million of Debt Securities Affected

New York, April 18, 2017 -- Moody's Investors Service, ("Moody's") assigned today a Ba2 corporate family rating (CFR) and senior unsecured rating to the proposed issuance of up to US$350 million senior unsecured notes by Energuate Trust (Energuate). This is the first time Moody's has assigned a rating to Energuate. The rating outlook is stable.

Energuate will largely use the proceeds from the notes to repay outstanding local debt (of nearly US$310 million). In addition, Energuate will make cash distributions to the shareholders of Distribuidora de Electricidad de Occidente, S.A.'s (DEOCSA) and Distribuidora de Electricidad de Oriente, S.A.'s (DEORSA) in the form of dividends (US$57 million) and capital reductions (US$73 million). To that end, Energuate will complement the proceeds from the notes with financing raised through a local bank on April 7, 2017 for total of up to Quetzal 1,140 million (equal to approximately US$155 million). Thus, after completion of the transaction the utilities' total debt obligations will aggregate US$450 million.

The assets of the trust consist of the trust's right to receive payments under a Participation Agreement entered with Credit Suisse AG, Cayman Island Branch (lender of record). The Trust Notes are structured so that funds available in the trust will be sufficient to pay amounts due on the Notes as if they were senior unsecured obligations of two Guatemalan utilities, namely DEOCSA and DEORSA. These utilities also absolutely, unconditionally and irrevocably guarantee, jointly and severally, all obligations, including debt service payments, to the Indenture Trustee, which acts on behalf of the Notes-holders.

The following rating actions were taken:

Assignments:

..Issuer: Energuate Trust

....Corporate Family Rating, Assigned Ba2

....Senior Unsecured Regular Bond/Debenture, Assigned Ba2

Outlook Actions:

..Issuer: Energuate Trust

....Outlook Stable

RATINGS RATIONALE

"The Ba2 ratings largely reflect the utilities' credit quality because of the structure of the transaction" said Natividad Martel, Vice President -- Senior Analyst. "The Ba2 ratings reflect the fully regulated nature of the utilities' operations. They also capture the overall credit supportiveness of the regulatory environment in Guatemala (Ba1 stable)", added Martel. They also consider the natural hedge that results from the semi-annual tariff adjustment-mechanisms which also drive the capital structure, in terms of the debt-mix between US$ versus Quetzal denominated indebtedness. The ratings further factor in the two utilities' adequate liquidity profile which is underpinned by the planned execution of two committed bank credit facilities for up to US$40 million, particularly because Moody's understands that borrowings will not be subject to material adverse change clauses.

The Ba2 ratings are tempered by the size of the utilities and their service territory, which is largely rural. The ratings also consider management's plan to, overtime, improve the utilities' operational performance and cash flows for example by stepping-up their investments in order to reduce non-technical losses and improve service quality. The Ba2 ratings also consider the deterioration in the combined key credit metrics, which in 2016 largely resulted from the additional debt to help fund the tax claims from the Guatemalan tax authorities (total US$74 million). In 2017, the incremental debt will be largely used to repay a US$120 million bridge loan that Inkia executed last year to aid the funding of the acquisition with the planned dividend distributions and capital reduction also expected to further weaken the debt to book capitalization metric.

The stable outlook assumes a credit supportive outcome of the next tariff review (January 2019) which along with the implementation of management's strategy allow the utilities to record combined key metrics that remain well-positioned within the Ba-rating category according to the guidelines provided under the Electric and Natural Gas Regulated Utilities Methodology; Specifically, that the CFO pre-W/C to debt will exceed 11%, on sustainable basis. This expectation considers the track-record of prudent financial policies of Inkia Energy Ltd (Ba3 stable; the controlling shareholder) as well as the debt incurrence test embedded in the financial documentation, namely a consolidated net debt to EBITDA of 4.5x (until December 2018) and 4.0x (afterwards) as well as an interest coverage ratio of 2.0x.

What can change the rating -- Up

Positive momentum on the rating is limited given the utilities' size and features of their service territory; however, a material improvement in the key credit metrics could result in an upgrade of the ratings; Specifically, if the CFO pre-W/C to debt and Retained Cash Flows (RCF) to debt exceed 22% and 17%, respectively, on a sustained basis.

What can change the rating -- Down

A downgrade is likely following a downgrade of the sovereign rating and/or if Moody's perceives that the utilities' relationship with the Guatemalan authority deteriorates and/or the credit supportiveness of the regulatory framework deteriorates, for example following a less credit supportive tariff review outcome and/or the inconsistent application of regulatory mechanisms that is detrimental for the utilities' credit quality. A downgrade is also likely if the utilities' credit metrics are weaker than currently anticipated for example if they are unable to recover on a timely manner the material increase in planned investments and/or due to the deterioration of the utilities' operating performance; Specifically, if the utilities' CFO pre-W/C to debt and/or interest coverage ratio fall below 10% and 3.0x, respectively.

The principal methodology used in these ratings was Regulated Electric and Gas Utilities published in December 2013. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Headquartered in the City of Guatemala, DEORSA and DEOCSA, on a combined basis, are one of two large energy distributors in Guatemala. They operate under a 50 year government authorization which is scheduled to expire in 2048. As of 31 December 2016, the utilities' aggregated customer base represented approximately 54.3% of Guatemala's regulated distribution customers while their supplied power accounted for 21% of the total. Energuate is the trade name for the utilities' collective electricity distribution business. In January 2016, Inkia (a subsidiary of IC Power Ltd, unrated), became the controlling shareholder of DEOCSA (90.6%) and DEORSA (92.7%).

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: 212-553-0376
SUBSCRIBERS: 212-553-1653

Michael J. Mulvaney
MD - Project Finance
Infrastructure Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

No Related Data.
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