New York, July 07, 2020 -- Moody's Investors Service ("Moody's") assigned a Baa3 rating to Empresas
Publicas de Medellin E.S.P´s (EPM, Baa3 negative)
planned issuance of senior unsecured notes. Final amounts and terms
will depend on market conditions, but we anticipate an issuance
ranging between $500 and $750 million, with maturity
in ten years.
The proceeds will be used for general corporate purposes. We expect
them to be used to strengthen the company's liquidity position amid
economic repercussions of the Covid-19 outbreak.
The assigned rating is based on preliminary documentation. Moody's
does not anticipate changes in the main conditions that the notes 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.
..Issuer: Empresas Publicas de Medellin E.S.P
....Senior Unsecured Regular Notes,
The Baa3 rating to the proposed senior unsecured notes reflects the senior
unsecured nature of the debt and its pari-passu nature relative
to other unsecured debts. The issuance does not include any covenants
EPM's ratings reflect its large scale and consolidated revenue base diversified
by sector, with the more stable electricity distribution business
being the most important EBITDA contributor, with a share of 43%
up until March 2020. The rating also recognizes the expected increase
in leverage, with debt to EBITDA increasing to approximately 5.5x
by year-end 2020, as a reflection of lower EBITDA generation
and higher indebtedness to support cash. The reduction in EBITDA
is a function of lower demand for services and rising costs amid weaker
hydrology. We expect EBITDA and cash flow to resume strongly in
2021, reestablishing the deleveraging trajectory such that debt
to EBITDA declines to approximately 4.0x by year-end.
The rating ultimately reflects that the company's liquidity will
be strengthened with the issuance of notes, and that the increase
in leverage is temporary.
The credit view continues to factor in EPM's guidance that 300MW (phase
1) will be in operations by early 2022, that it will receive insurance
coverage proceeds related to damages of COP1.9 trillion until the
end of 2021, and that total capex for the Ituango Project will be
of around COP15.3 trillion, which represents a 34%
increase over the initial budget. The further delay in completion
of Ituango to early 2022 as a result of the spread of the coronavirus
within the project does not have a significant effect in 2021 EBITDA.
Under this scenario, we expect total Moody's-adjusted debt
to peak at around COP27 trillion by year-end 2020. Within
these assumptions, we expect leverage measured by total Moody's-adjusted
debt-to-EBITDA to peak at 5.5x by year-end
2020 and decline to 3.5x by 2022. We expect [CFO pre
WC / debt] and interest coverage, measured by [CFO pre WC +
interest expense]/ interest expense, to reach 18-19%
and 4.0x, respectively, by 2022.
As a government related issuer, EPM's ratings reflect its ownership
structure and linkages to the City of Medellin (Baa2 stable), on
top of its intrinsic credit quality, measured by the bca of ba1.
The ratings consider the 'Strong' support and 'Very High' dependence to
the City of Medellin.
The negative outlook reflects the risks that still remain to the leverage
trajectory given the uncertainties regarding the Ituango hydro plant,
including the degree of damage to existing infrastructure, cost
overruns for completion, insurance reimbursements, and total
costs and potential fines related to social and environmental consequences.
The risks to leverage trajectory are magnified by the fact that the company
achieved only 20% progress of the previously announced divestment
plan, which is not expected to move forward.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATING
The outlook can be revised to stable upon conclusion of overall damage
assessment of Ituango with a clear path to resumption of completion of
construction works, including the conclusion of the independent
engineer report with the full lifting of the restrictions imposed by Autoridad
Nacional de Licencias Ambientales -- ANLA. Quantitatively,
a positive action can occur upon clear indications that Debt to EBITDA
will be below 4.0x, with [CFO pre WC / Debt] and [CFO
pre WC + Interest Expense]/ Interest Expense reaching above 17%
and 3.5x, respectively, on a sustainable basis.
The rating could be downgraded should overall third party liability or
environmental expenses cause significant pressure on credit metrics and/or
if further incidents at Ituango cause additional environmental damage,
third-party liability expense, or permanent/irreversible
damage to the project's infrastructure. Negative rating pressure
will arise upon indication of further cost overruns, further delays,
or potentially project cancellation, leading to a perception of
Debt to EBITDA remaining above 4.0x, with [CFO pre WC
/ Debt] and [CFO pre WC + Interest Expense]/ Interest Expense
kept below 17% or 3.5x. A perception of lower support
from the Municipality of Medellin would also exert negative rating pressure.
Headquartered in Medellin, Colombia, EPM is a multi-utility
vertically integrated public service group operating in energy generation,
distribution and transmission; natural gas distribution; water
and sanitation; solid waste management; and telecommunications.
For the 12 months ended March 2019, 75% of the company's
EBITDA was derived from the electricity distribution (43%) and
energy generation (32%) segments. The company benefits from
35 power generation plants with installed generation capacity of 3,584
MW. EPM also serves 6.6 million consumers in the distribution
segment. Apart from providing its own services, the group
also holds ownership stakes in controlled and noncontrolled subsidiaries
located in Colombia and abroad (mainly Chile, Panama, El Salvador,
Guatemala and Mexico).
The methodologies used in this rating were Unregulated Utilities and Unregulated
Power Companies published in May 2017 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1066389,
and Government-Related Issuers Methodology published in February
2020 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1186207.
Alternatively, please see the Rating Methodologies page on www.moodys.com
for a copy of these methodologies.
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.
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