New York, January 25, 2011 -- Moody's assigned a Baa3 LC rating to the ColPs 1,250 billion (equivalent
to around US$678 million) to the senior unsecured notes due in
2021 issued by Empresas Publicas de Medellin S.A. E.S.P.
(EPM). The outlook is stable.
This rating action reflects the fact that EPM's Baseline Credit
Assessment (BCA) of 11 (maps to Ba1) or stand-alone credit risk
profile captures the anticipated material increase in leverage to fund
the group's sizeable capital expenditure (capex) program and the
progressive deterioration in strong historical credit metrics.
Moody's expects that EPM will continue reporting credit metrics
that are commensurate with the Baa rating category with Retained Cash
Flow to debt and interest coverage ratios of at least 21% and 4x,
respectively, on a sustainable basis.
The Baa3 rating reflects EPM's ownership structure and linkages with the
City of Medellin (Baa3, Stable). Given it is fully owned
by the City of Medellin, it falls under the scope of Moody's rating
methodology for government-related issuers (GRIs). The rating
reflects Moody's assessment of a medium-level probability of extraordinary
support from the municipality and a high level of dependence, which
reflects the degree to which Medellin is exposed to the same risks as
those that would affect credit quality at EPM. EPM's BCA,
which is a representation of the group's intrinsic creditworthiness before
taking into account possible extraordinary support from the municipality,
is 11 (maps to Ba1), based on a scale of 1-21 in which 1
indicates the highest credit quality (Aaa).
EPM's BCA considers that the parent company which has incurred most
of the group's outstanding indebtedness, has operating assets
which generate the majority of the cash flows. The BCA is further
underpinned by EPM's diversified and leading business position as
a major power and utility service provider in Colombia, and captures
the cash flow predictability associated with its regulated business units
the bulk of which operates under the relatively transparent and stable
Colombian regulatory framework albeit it is still subject to further developments.
While EPM's recent acquisitions outside of Colombia, such
as the recent ones in Guatemala, El Salvador, and Panama,
are not without risks as they expose the group to regulatory jurisdictions
that are, in Moody's opinion, less familiar and transparent
than the Colombian regulatory framework, we acknowledge the benefits
of the geographic diversification associated with this international expansion.
Nevertheless, the BCA is tempered by EPM's material exposure
to the unregulated power generation sector where the company is pursuing
substantial investments in new power plants.
In the wake of the increase in leverage, particularly at the end
of 2010 and early 2011 to fund its material expansionary plans,
Moody's gains comfort from EPM's track record of relative
conservative practices to fund its acquisitions and investments that includes
the use of significant amount of internally generated resources.
Furthermore, it is Moody's understanding that during 2011
a substantial debt amount will become due reducing the reported amount
of gross debt outstanding following this debt issuance. It should
be further noted that the group's ability to incur additional debt is
limited by covenants embedded in some of EPM's financial documentation.
We also understand that the recent acquisitions of electric subsidiaries
abroad and the new power plants account for the bulk of the company's
expansion goal to increase the consolidated revenues to US$5 billion
by 2015. It is our understanding, that EPM strives to generate
around 40% of the revenues abroad.
EPM's BCA also incorporates the governance framework agreement that
limits the risk of political interference by the Municipality of Medellin,
provides visibility of its dividend distribution policy, as well
as the fiscal public control that results from its municipal ownership.
EPM's BCA is still tempered by its liquidity profile given its reliance
on the capital markets in the absence of committed credit facilities,
and the lower than anticipated hedged foreign exchange debt.
Moody's understands that under the terms of the Colombian Peso denominated
issuance, EPM bears no foreign exchange risk when servicing this
debt. Instead, such risk is fully borne by the investors.
The payments required to serve this debt will depend on the exchange rate
between the Colombian peso and US dollar at the time of the relevant payments.
Importantly, to the extent that the Colombian peso depreciates relative
to the US dollar, the payments of principal, interest and
any other related amounts, if any, expected to be received
on the notes in U.S. dollars would decrease. Moreover,
if the Colombian peso were to depreciate against the U.S.
dollar, the principal amount due at maturity, upon redemption
or should a change of control payment occur could be less than the initial
amount of principal originally invested. Alternatively, in
the case where the Colombian peso were to appreciate against the U.S.
dollar, those amounts could be higher than the initial amount of
principal originally invested.
The outlook on EPM's ratings is stable, which is based on Moody's
belief that EPM will be able to successfully manage its current increased
leverage position, ongoing substantial capex program, and
liquidity in such a way that the reported credit metrics will continue
to be well positioned for its current BCA rating.
The BCA rating could be upgraded if EPM successfully manages the implementation
of its current expansion plan, particularly in terms of cash flows,
leverage as well as liquidity, and upon evidence of further improvements
in the credit supportiveness of Colombia's regulatory framework.
Quantitatively, an upgrade could be triggered if EPM reports Retained
Cash Flow (RCF) over Total Debt higher than 22% and CFO pre W/C
interest coverage higher than 4.5x, both on a sustainable
The BCA rating could be downgraded as a result of deterioration in the
credit supportiveness of the Colombian regulatory framework or EPM's inability
to recover costs in a timely manner. A rating action could be also
triggered if EPM's management of its expansion plan is poorly executed
or indebtedness increases significantly above anticipated levels resulting
in a material deterioration of its credit metrics, such that the
interest coverage falls below 3.5x and the Retained Cash Flow (RCF)
over Total Debt drops below the mid-teens' level.
Apart from a change in the standalone fundamental credit quality of the
issuer, the ratings of the notes could be downgraded if EPM decided
to incur significant amounts of secured debt as a proportion of total
debt (currently all debt is unsecured). Moreover, a significant
deterioration of the financial strength of the City of Medellin or a downgrade
in Colombia's foreign currency ceiling could negatively affect EPM's ratings
..Issuer: Empresas Publicas de Medellin E.S.P
....Senior Unsecured Regular Bond/Debenture,
The last rating action on EPM was to assign a (P) Baa3 rating to EPM's
planned debt issuance and to affirm its Baa3 local currency issuer rating
and Baa3 foreign currency rating of its outstanding US$500 million
senior unsecured notes on January 14, 2011.
The principal methodologies used in rating EPM are the Moody's Regulated
Electric and Gas Utilities and Unregulated Power Generation Companies
rating methodologies published in August 2009 and the Government Related
Issuers: Methodology Update published in July 2010.
Headquartered in Medellin, Empresas Publicas de Medellin,
S.A. E.S.P. (EPM), is a vertically
integrated multi-utility company controlled by the City of Medellin
which provides generation, transmission, distribution and
commercialization of electricity and natural gas as well as water and
sewage services. EPM also offers telecommunications service through
its 99.99% subsidiary EPM Telecomunicaciones S.A.
E.S.P (trade mark: UNE). As of September 30,
2010, EPM reported assets of approximately US$15 billion
(about 90% of the group's consolidated assets).
Information sources used to prepare the credit rating are the following:
parties involved in the ratings, parties not involved in the ratings
and public 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.
Infrastructure Finance Group
Moody's Investors Service
William L. Hess
MD - Utilities
Infrastructure Finance Group
Moody's Investors Service
Moody's Investors Service
Moody's assigns Baa3 rating to EPM's senior unsecured notes
250 Greenwich Street
New York, NY 10007