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19 Nov 2009
Approximately BRL 250 million of debt instruments affected
Sao Paulo, November 19, 2009 -- Moody's America Latina's assigned a Ba1 global scale corporate family
rating and Aa2.br corporate family rating on the Brazilian National
Scale to Alupar Investimento S.A. ("Alupar").
At the same time, Moody's assigned a Ba2 global scale rating and
Aa3.br rating on the Brazilian National Scale to the 4 to 5 year
BRL 250 million senior unsecured debentures to be issued in the local
market by Alupar. The outlook for all ratings is stable.
This is the first time Moody's has rated this company.
The Ba1 corporate family rating largely reflects Alupar's solid
position in the Brazilian electricity transmission sector, which
generally offers more predictable and stable cash flow than does the electricity
distribution and generation segments, the company's strong
credit metrics for the rating category and adequate liquidity position.
The ratings are constrained by the limited track record of Alupar's
operations as an independent arm of the Alusa group and the fact that
management's ability to efficiently carry out its business strategy
going forward is limited to the company's brief historical performance.
An ambitious investment program to expand the scope of Alupar's
activities into the electricity generation business further constrains
the ratings as Moody's views the generation business segment as
generally riskier than the transmission sector. Moody's also
expects leverage as measured by Debt/Cap to increase within the next three
years although cash flow to debt and interest coverage are expected to
The Ba2 and Aa3.br debentures ratings are one notch lower than
the corporate family rating. The difference reflects the structural
subordination of the holding company's debt to debt at the level
of the operating subsidiaries.
Moody's views the regulatory framework for transmission companies in Brazil
as reasonably well developed and highly supportive although some regulatory
procedures are still untested, such as the indemnification of non-depreciated
assets upon the non-renewal or termination of an existing concession.
The inherently stable nature of the transmission sector provides Alupar
with reasonably predictable cash flow, which is underpinned by 30-year
concession contracts granted by the federal government. These concession
contracts typically allow Alupar to sign long-term contracts with
the Brazilian electricity generation and distribution companies for the
use of its transmission grid. The transmission revenues are based
on fixed capacity payments throughout the concession period that have
provisions for automatic adjustments for inflation once a year in accordance
with the general price index (IGP-M) or the consumer price index
Alupar currently operates 12 transmission networks under long-term
concessions expiring between 2031 and 2039. The company largely
benefits from having a portfolio that consists of concessions primarily
granted before 2006; therefore, the majority of its tariffs
are not subject to periodic review. On the other hand, the
permitted annual revenues of these major concessions are scheduled to
step down 50% starting in 2019.
Alupar's credit metrics, which are adequate for the rating
category, are supported by long-term contracts for electricity
transmission. Returns are also enhanced by tax incentives that
reduce the effective tax rate, which Moody's estimates to average
around 18% until 2013. Leverage as measured by Net Debt
to Fixed Assets, adjusted in accordance with Moody's standard adjustments,
was 57.1% on September 30, 2009. In the last
twelve months ended September 30, 2009, the interest coverage
ratio (ICR) was 2.3x and Funds From Operations (FFO) to Net Debt
was 17%. These strong metrics are tempered by a low Retained
Cash Flow (RCF) to capital expenditures ratio of just 0.17x during
the same period. The low RCF to capital expenditures results primarily
from the ongoing investment program for expansion in the generation business.
Going forward, Moody's expects Alupar's leverage as measured by
the FFO to Net Debt ratio to increase into the 19-20% range,
particularly over the next couple of years despite the new generation
assets that are currently being constructed. The transmission business,
currently representing 100% of the company's revenues,
is expected to gradually decrease its contribution to 75% in five
years. During this construction phase Moody's expects Alupar's
Net Debt to Fixed Assets to remain in the 60%-63%
range and ICR to be around 2.5x. The healthy ICR is supported
by the company's relatively low cost of funding, which is helped
by subsidized loans from the BNDES (equivalent to 63% total unadjusted
debt as of September 30, 2009).
Alupar has several off- balance-sheet arrangements,
which Moody's estimates at approximately BRL 213 million.
These arrangements consist of put options where the minority shareholders
of certain subsidiaries have the right to sell their shares back to Alupar
under pre-arranged schedules and conditions along with share purchase
agreements where Alupar is required to increase its ownership in certain
subsidiaries. Moody's considers these arrangements as long-term
obligations of Alupar and has included them with the company's existing
Alupar has adequate liquidity, with a cash position at the holding
company level of approximately BRL 400 million as of September 30,
2009, which is intended to cover the equity investments planned
over the next four years. As a holding company, Alupar's
cash flows consist primarily of dividends received from its operating
subsidiaries, which Moody's estimates at approximately BRL 150 million
over the next twelve months. This amount along with the resources
from the BRL 250 million debentures issue is deemed sufficient to meet
expected debt service and overhead expenses in 2010. The potential
to upstream dividends from its subsidiaries is constrained by the debt
service of about BRL1.9 billion in long-term loans,
mostly from the BNDES. In addition, the subsidiaries are
subject to regulatory ring-fencing provisions that limit other
possibilities to upstream cash, such as a capital split or an inter-company
loan, which would need regulatory approval from ANEEL.
Formed in 2006, Alupar effectively started operations in September
2007 as a holding company to consolidate the interests of the electricity
transmission business of the Alusa group, which has primarily been
focused on engineering activity in Brazil. In September 2009,
the equity fund FI-FGTS of the Brazilian state-owned bank,
Caixa Econômica Federal, became Alupar's minority shareholder
by acquiring 17% of its total and voting capital for BRL 400 million.
Until recently Alupar provided guarantees to approximately BRL300 million
of bank notes issued by its parent company, Guarupart. These
notes have been reduced to BRL 23 million as of September 30, 2009.
According to the management, all the remaining guarantees issued
to Guarupart have been eliminated by the present date. The risk
that Alupar will provide additional guarantees to the parent company in
the future has been largely mitigated by the new shareholder's agreement
executed as of September 18, 2009, which includes a limitation
on transactions between related parties. The company may eventually
enter in EPC agreements with the Alusa Engenharia for the development
of activities in generation and transmission, but the regulatory
approval of ANEEL and the minority shareholder are previously required.
The entrance of FI-FGTS in the capital structure of Alupar was
an important step as it assured the company of having the financial resources
necessary to fund the required equity contributions on further investments
focused on the generation business. Moody's also deems this
as a positive step for the company as the new independent shareholder
may enhance corporate governance practices by assuring higher transparency.
It should also further the commitment to increase shareholder value.
Management has recently stated that it would be pursuing investments in
the generation business. It will primarily use the recent BRL 400
million capitalization for equity contribution in joint ventures to be
formed for the construction of small hydro power plants, which could
potentially leverage total investment in generation to the BRL 1.3
Moody's views the generation business as riskier than the transmission
business, which is highly regulated. The market determines
operating margins for the generation business, resulting in potentially
volatile earnings and cash flows. The ability to recover costs
and earn adequate returns in this segment is a function of the level of
secured output through power purchase agreements (PPA) along with the
degree of capital requirements and asset operating performance.
Revenues from the regulated business segment are more predictable and
allow for more stable operating margins and cash flow. PPAs with
free consumers are short term in nature and expose Alupar to potentially
lower energy prices and revenues in a scenario in which future tariffs
decline. Moody's notes that Alupar has 179MW of new installed
capacity coming on stream in 2010, of which 65% sold to the
regulated market under 30-year PPAs and 35% sold on to free
market clients under 15-year PPAs.
The stable outlook reflects Moody's expectation that Alupar will maintain
solid credit metrics for the Ba1 rating category and an adequate liquidity
position despite forecasted negative free cash flow for the next couple
of years. Moody's also expects that Alupar will maintain
adequate corporate governance practices by managing its business in line
with its stated business strategy for the electricity sector and balancing
the interests of shareholders and debt investors.
The ratings could be upgraded should Alupar's credit profile establish
a sustained track record of remaining healthy, particularly during
the generation investment and expansion phase. An ICR greater than
2.5x along with the Net debt to Fixed Assets below 55% on
a sustainable basis would also create upward pressure on the rating.
The rating or outlook could be downgraded if there is significant increase
in leverage, either in connection with the heavy generation investment
program or the incurrence of incremental debt at the level of the transmission
subsidiaries. Quantitatively, the rating or outlook could
come under pressure if the ICR falls below 2.0x and the Net debt
to Fixed Assets stays above 70% for an extended period.
A material change in the regulatory framework in Brazil could also cause
a downgrade in the rating or outlook.
The Aa2.br national scale ratings reflect the standing of credit
quality relative to domestic peers. Moody's National Scale Ratings
(NSRs) are intended as relative measures of creditworthiness among debt
issuances and issuers within a country, enabling market participants
to better differentiate relative risks. NSRs in Brazil are designated
by the ".br" 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
The principal methodology used in rating Alupar was Regulated Electric
and Gas Networks Rating Methodology (August 2009), which can be
found at www.moodys.com in the Rating Methodologies sub-directory
under the Research & Ratings tab. Other methodologies and factors
that may have been considered in the process of rating this issuer can
also be found in the Rating Methodologies sub-directory on Moody's
Alupar controls 15 transmission companies in Brazil (12 operating and
3 under construction) with a total extension of 4,515 km,
three of which are currently under construction and will be operating
by 2010-2011. Alupar also has four generation companies
with a total installed capacity of 179MW that will start operations in
2010. Alupar is controlled by Guarupart Participações
Ltda., a family-owned holding company with participation
in construction businesses, engineering services in addition to
the electricity sector in various Latin American countries. In
the last twelve months ended September 30, 2009, Alupar had
consolidated net sales of BRL 642 million (USD 300 million) and net profit
of BRL 99million (USD 46 million).
Asst Vice President - Analyst
Infrastructure Finance Group
Moody's America Latina Ltda.
Moody's assigns Ba2/Aa3.br ratings to Alupar's Debentures
William L. Hess
Infrastructure Finance Group
Moody's Investors Service
No Related Data.
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