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Rating Action:

Moody's assigns Baa3 rating to AES Corporation's new secured notes; affirms Ba1 CFR, stable outlook

15 May 2020

Approximately $1.5 billion of debt securities rated

New York, May 15, 2020 -- Moody's Investors Service, ("Moody's") assigned a Baa3 senior secured rating to The AES Corporation's (AES) new issuance of up to $1.5 billion of senior secured notes. Moody's affirmed the company's Ba1 Corporate Family Rating (CFR), Ba1 senior unsecured rating and the Ba1-PD Probability of Default rating (PDR). The Speculative Grade Liquidity Rating (SGL) is unchanged at SGL-2. The outlook for AES is stable.

AES intends to use the net proceeds from the secured notes to fund the early redemption of senior unsecured notes, net of related costs.

RATINGS RATIONALE

"The Baa3 rating assigned to AES Corporation's new secured notes reflects the debt security's senior position in the capital structure compared to its unsecured debt", said Natividad Martel, VP-Senior Analyst. "This reflects a collateral package consisting of a pledged stock of the company's subsidiaries", added Martel. We note that the new secured notes indenture will include a fall away provision that would release this collateral and any related guarantees if AES achieves investment grade ratings from two rating agencies. If the fallaway provision is triggered, this could trigger a downgrade of the notes to Ba1, the company's current senior unsecured rating.

AES' secured debt rating reflect Moody's Loss Given Default (LGD) methodology. Following the issuance of the new notes, the company's secured debt will consist of both these notes and its committed revolving credit facility (commitment $1 billion due in 2024), which is also secured. The increase in the amount of secured debt in the capital structure has weakened the recovery prospects of the unsecured notes, although not enough to result in a downgrade of the unsecured debt.

The affirmation of AES' Ba1 CFR reflects the scale and diversification provided by the large number of subsidiaries operating in twelve countries. The affirmation also factors in the group's business risk with operations in the US representing around 35% of the group's financial performance at year-end 2019.

During the first quarter 2020 earnings call last week, management disclosed the financial impact of the coronavirus outbreak on the group's financial performance. A significant reduction in power sales has particularly affected the company's US regulated utilities, namely Indianapolis Power & Light Company (Baa1 stable) and Dayton Power & Light Company (Baa2 negative). These utilities do not benefit from decoupling mechanisms that insulate their cash flows from volatility in sales volumes due to weather, economic conditions or efficiency. The affirmation of AES' CFR considers, however, the performance of the rest of the group's contracted operations in the US and in emerging markets. A material portion of these contracts are subject to take or pay clauses that help to mitigate the impact of reduced sales amid the coronavirus on these subsidiaries' cash flows. That said, the current economic situation may eventually affect their off-takers' credit quality and cause an increase in bad debt expenses and outstanding receivables.

The stable outlook reflects the material repayment of parent company debt in recent years and the company's ability to exhibit relatively stable consolidated credit metrics, including a ratio of cash flow from operations excluding changes in working capital (CFO pre-W/C) to debt of around 12.5% at year-end 2019. The ratio dropped to around 11% for the last twelve-month period ended March 2020 due to a combination of the financial impact of the pandemic and increased borrowings under its credit facility. An improvement in consolidated credit metrics will depend on the ultimate impact of the coronavirus outbreak. Metrics should be supported by AES Southland LLC's full year of long-term contracted cash flows, after achieving commercial operation earlier this year, and our expectation of the repayment of majority of the $805 million borrowed amount under the credit facility.

Liquidity

The SGL-2 reflects good liquidity from strong internal cash flow generation, a robust cash balance and near term asset sales. Although the availability of external sources of liquidity is currently highly constrained, we anticipate that AES will repay by year end a material portion of the $805 million currently borrowed under its $1 billion committed credit by the end of the second quarter Management has disclosed that around $250 million of the borrowed amount was to protect the company's liquidity amid the capital market shocks caused by the coronavirus outbreak while it used the rest for corporate general purposes. The parent company's cash balance approximated $350 million end of March 2020 compared to $13 million at year-end 2019.

Borrowings under the facility are subject to conditionality including a material adverse change clause representation. The facility has two financial covenants including a minimum cash flow coverage ratio of 2.5x and a maximum recourse debt to cash flow ratio of not more than 5.75x (both metrics calculated on a parent only basis). We anticipate that AES will remain in compliance with substantial headroom.

The SGL-2 also factors in management's expectation that the company's free cash flow will range between $725 million and $775 million this year and that it will receive net proceeds from the sale of assets of around $550 million. AES will also use group's available cash flows to fund its planned equity contributions to the subsidiaries of around $565 million during 2020, including around $150 million to DPL Inc, (Ba1 negative) and AES Gener S.A. (Baa3 stable).

Assignments:

..Issuer: AES Corporation, (The)

....Senior Secured Regular Bond/Debenture, Assigned Baa3 (LGD3)

Affirmations:

..Issuer: AES Corporation, (The)

.... Corporate Family Rating, Affirmed Ba1

.... Probability of Default Rating, Affirmed Ba1-PD

....Senior Unsecured Regular Bond/Debenture, Affirmed Ba1 (LGD4)

Outlook Actions:

..Issuer: AES Corporation, (The)

....Outlook, Remains Stable

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

FACTORS THAT COULD LEAD TO AN UPGRADE

AES' ratings could be upgraded if there is a further improvement of AES' business risk and consolidated financial profile, where the ratio of consolidated FFO to consolidated debt reaches at least 16% on a sustained basis. This metric threshold is below what is required for a "Baa" score for this factor in Moody's rating methodology because of the company's diversification and contracted cash flows. A ratings upgrade will also require that the company maintains good liquidity and exhibit financial policies consistent with an investment grade rating.

FACTORS THAT COULD LEAD TO A DOWNGRADE

A downgrade could occur if AES diverges from its de-risking business strategy or implements more aggressive financial policies or if a more contentious regulatory environment emerged in any of AES' key subsidiary jurisdictions, particularly in Indiana. Following the deterioration recorded end of March 2020, AES' ratings could also be downgraded if the ratio of consolidated FFO to consolidated debt remained below 12%, for a sustained period of time.

The principal methodology used in these ratings was Unregulated Utilities and Unregulated Power Companies published in May 2017 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1066389. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

AES is a globally diversified power holding company that owns a portfolio of electricity generation and distribution businesses in twelve countries. In total, AES has ownership interests in over 30,000 MW of generating capacity across the globe and serves retail customers via its distribution subsidiaries in two countries.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security 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.

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

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

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: 1 212 553 0376
Client Service: 1 212 553 1653

Michael G. Haggarty
Associate Managing Director
Infrastructure Finance Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
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