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Rating Action:

Moody's assigns Ba2/Aa1.br ratings to AES Tiete´s planned BRL 1.0 billion debentures; stable outlook

 The document has been translated in other languages

20 Mar 2017

Sao Paulo, March 20, 2017 -- Moody's America Latina (Moody's) assigned ratings of Ba2/Aa1.br (respectively, in global scale and Brazil´s national scale) to AES Tiete Energia S.A.´s ("AES Tiete" or "the company") planned BRL 1.0 billion senior unsecured debentures. The outlook remained stable.

The debentures have two tranches with 5 and 7-year maturities and biannual interest payments starting in October, 2017. The first and second tranches will have two principal payments, 50% in the penultimate year of the tenor (2021 and 2023 respectively) and the remaining at maturity (2022 and 2024, respectively), but only the second tranche´s amount is adjusted by inflation (IPCA index). The debentures will have cross-default clauses with the issuer's other debt as well as with relevant subsidiaries and will include acceleration clauses such as: (i) the non-payment of any financial obligation above USD 25 million, (ii) change of control and termination of the concession contract (iii) granting intercompany loans for up to 180 days if not previously approved by creditors, (iv) dividend payments above the minimum required by Brazilian Corporate Law if the company is not in compliance with its obligations including the financial covenants (v) covenant breach in two consecutive quarters on the following: Net Debt/EBITDA maintained at levels equal or below 3.5x and if AES Tiete performs any acquisition the ratio is 3.85x during 36 months after the deal conclusion; interest coverage ratio measured by EBITDA/ Net Interest expense equal to or above 1.5x.

The assigned ratings are based on preliminary documentation. Moody's does not anticipate changes in the main conditions that the debentures will carry. Should issuance conditions and/or final documentation deviate from the original ones submitted and reviewed by the rating agency, Moody's will assess the impact that these differences may have on the ratings and act accordingly.

RATINGS RATIONALE

The Ba2/Aa1.br rating reflect AES Tiete's relatively low leverage and adequate credit metrics for the rating category as well as its resilient access to the local banking and capital markets together with management´s prudent administration of the generation business. Our rating also incorporates the improved hydrology conditions and the consequent better cash generation although at lower levels compared to the historical threshold mainly due to the termination of the bilateral supply contract with Eletropaulo Metropolitana Eletricidade de Sao Paulo S.A. (Ba3 stable) set above market prices.

AES Tiete´s ratings are constrained by the Capex pressures from the contractual obligation to expand generation capacity by 15% in the State of Sao Paulo (Ba2 stable) coupled with high dividend payout and the potential cash outflow (BRL 315 million, provisioned as of December, 2016) of the judicial dispute over the spot market exposure during the hydrological crisis.

What Could Change the Rating - Up /Down

The stable outlook reflects our view of AES Tiete´s relatively stable cash flows in the projected period, although at lower levels than historical average. We foresee AES Tiete´s debt profile to improve as the new debenture issuance will lengthen the debt maturity. Moody´s also considers that dividend outflows and any acquisitions or M&A activity will be prudently managed to maintain adequate liquidity and credit metrics for the rating category.

We could upgrade the ratings if AES Tiete´s operational performance surpass our expectations or if liquidity improves. If the credit metrics stay above our projections such that cash interest coverage (CFO Pre WC + Interest/ Interest) stays above 4.5x and the CFO Pre WC/Debt above 35% for a sustainable period, we could also consider an upgrade. Nevertheless, AES Tiete´s ratings are constrained by Brazil´s sovereign rating.

A rapid or significant downturn in AES Tiete´s credit metrics such as cash interest coverage (CFO Pre WC + Interest/ Interest) stays below 2.0x and the CFO Pre WC/Debt below 19% on a sustainable basis could prompt a rating downgrade as well as the degradation of the liquidity and overall credit quality. The company's operating margin potentially coming under pressure from a significant mismatch on spot market exposure or on contracted levels could also weigh on the ratings.

AES Tiete is a hydropower generation company with a 30-year concession, granted in December 1999 to operate an installed capacity of 2,658 MW, equivalent to around 2% of Brazil's electricity capacity, and 1,278 MW of assured average energy. The company has 9 hydro-power plants (HPPs) and 3 small hydro-power plants (SHPPs) located in the State of Sao Paulo. As reported in the FY2016, AES Tiete has 88% of its energy contracted for 2017 and did not adhere to the law 13,203 that hedges the hydrological risk for a premium as negotiated with the regulator, Aneel, although we expect the company to maintain an uncontract 10-15% cushion through its portfolio management.

According to Moody´s standard adjustments, AES Tiete reported net operating revenues of BRL1,561 million and EBITDA of BRL886 million in the FY 2016.

The principal methodology used in these ratings was Unregulated Utilities and Unregulated Power Companies published in October 2014. Please see the Rating Methodologies page on www.moodys.com.br for a copy of this methodology.

Moody's National Scale Credit 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 credit 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 ".za" for South Africa. For further information on Moody's approach to national scale credit ratings, please refer to Moody's Credit rating Methodology published in May 2016 entitled "Mapping National Scale Ratings from Global Scale Ratings". While NSRs have no inherent absolute meaning in terms of default risk or expected loss, a historical probability of default consistent with a given NSR can be inferred from the GSR to which it maps back at that particular point in time. For information on the historical default rates associated with different global scale rating categories over different investment horizons, please see https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1060333.

REGULATORY DISCLOSURES

Information sources used to prepare the rating are the following: parties involved in the ratings and public information.

Information types used to prepare the rating are the following: financial data, debt documentations, operating data, and regulatory filings.

Sources of Public Information: Moody's considers public information from many third party sources as part of the rating process. These sources may include, but are not limited to, the list available in the link http://www.moodys.com/viewresearchdoc.aspx?docid=PBC_193459.

Moody's considers the quality of information available on the rated entity, obligation or credit satisfactory for the purposes of issuing a rating.

Moody's adopts all necessary measures so that the information it uses in assigning a 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.

The rating has been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

Please see the ratings disclosure page on www.moodys.com.br for general disclosure on potential conflicts of interests.

Moody's America Latina Ltda. may have provided Other Permissible Service(s) to the rated entity or its related third parties within the 12 months preceding the credit rating action. Please go to the report "Ancillary or Other Permissible Services Provided to Entities Rated by Moody's America Latina Ltda." in the link http://www.moodys.com/viewresearchdoc.aspx?docid=PBC_194573 for detailed information.

Entities rated by Moody's America Latina Ltda. and the rated entities' related parties may also receive products/services provided by parties related to Moody's America Latina Ltda. engaging in credit ratings activities within the 12 months preceding the credit rating action. Please go to the link http://www.moodys.com/viewresearchdoc.aspx?docid=PBC_194574 for a list of entities receiving products/services from these related entities and the products/services received.

The date of the last Credit Rating Action was 17/3/2017

Moody's ratings are constantly monitored, unless designated as point-in-time ratings in the initial press release. All Moody's ratings are reviewed at least once during every 12-month period.

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.br.

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.

Please see ratings tab on the issuer/entity page on www.moodys.com.br for the last rating action and the rating history. The date on which some ratings were first released goes back to a time before Moody's ratings were fully digitized and accurate data may not be available. Consequently, Moody's 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.br for further information.

Please see Moody's Rating Symbols and Definitions on the Ratings Definitions page on www.moodys.com.br for further information on the meaning of each rating category and the definition of default and recovery.

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.br 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.br for additional regulatory disclosures for each credit rating.

Aneliza Crnugelj
Analyst
Infrastructure Finance Group
Moody's America Latina Ltda.
Avenida Nacoes Unidas, 12.551
16th Floor, Room 1601
Sao Paulo, SP 04578-903
Brazil
JOURNALISTS: 800-891-2518
SUBSCRIBERS: 55-11-3043-7300

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

Releasing Office:
Moody's America Latina Ltda.
Avenida Nacoes Unidas, 12.551
16th Floor, Room 1601
Sao Paulo, SP 04578-903
Brazil
JOURNALISTS: 800-891-2518
SUBSCRIBERS: 55-11-3043-7300

No Related Data.
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