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Rating Action:

Moody's assigns a Baa3 and Ba2 ratings to Naranjal/Litoral Issuer 1 and 2 notes offering; stable outlook

13 Jun 2018

New York, June 13, 2018 -- Moody's Investors Service assigned a Baa3 rating to the proposed issuance by Naranjal/Litoral Uruguay Issuer 1 for approximately $ 97.3 million of senior secured notes due June 2042 and a Ba2 rating to the proposed issuance by Naranjal/Litoral Uruguay Issuer 2 of approximately $ 11.0 million of subordinated notes due June 2033. The rating outlook is stable.

Proceeds from the notes will be used to refinance an existing loan used for the development and construction of El Naranjal and Del Litoral, two solar power projects located in Salto, Uruguay. The issuers of the notes are two special purpose vehicles, established solely for the purpose of issuing the senior and subordinated B Notes to fund the senior B loan participation and the subordinated B loan participation, per the participation agreement with the Inter-American Investment Corporation ("IDB Invest"), the lender of record. The proceeds from the notes will be provided by IDB Invest to Colidim S.A. and Jolipark S.A., the borrowers, which are wholly owned by Atlas and indirectly by Actis.

Moody's has reviewed the draft legal documentation provided to date related to the transaction and the assigned ratings assume that there will be no material variation from the drafts reviewed and that all agreements will be legally valid, binding and enforceable.

Assignments:

..Issuer: Naranjal/Litoral Uruguay Issuer 1

....Senior Secured Regular Bond/Debenture, Assigned Baa3

..Issuer: Naranjal/Litoral Uruguay Issuer 2

....Subordinated Regular Bond/Debenture, Assigned Ba2

RATINGS RATIONALE

The assigned ratings take into consideration the project's expected cash flows profile, derived from a fixed-price, long term power purchase agreement ("PPA") due in December 2043 executed with Administración Nacional de Usinas y Trasmisiones Eléctricas ("UTE", not rated), Uruguay´s (Baa2, stable) fully owned vertically integrated electricity company.

Our view of cash flows predictability under the PPAs is based on the following features of the projects: 1) fixed-price payments under the PPAs, adjusted by inflation, over the life of the contracts, 2) no minimum production required; 3) curtailment provisions that compensate the projects if the grid is unavailable and 4) projects are already in operations.

The rating also incorporates that the projects have recently secured an Operations & Maintenance ("O&M") agreement with Ingener, an Uruguayan engineering and services company, also under a fixed-price contract that includes a 2% yearly escalation. The 10 year contract term (5 years automatically renewable for another 5 years) is however shorter than the duration of the PPAs or the debt maturity. The assigned ratings capture our understanding of fairly standard prices contained in the O&M agreement and the project's ability to replace or renew the contract after the first 10 years at reasonable terms. However, Moody's considers that the shorter duration of the O&M contract relative to the tenor of the debt adds some level of uncertainty to the projects cash flows, a weakness relative to other rated power generation projects in Uruguay.

While the technology used by the projects is well-known (solar panels are provided by Trina Solar, a leading firm in the sector) it also incorporates trackers (from Nextracker). Tracking technology for solar panels increases generation efficiency but also adds complexity to the operation of a solar plant. Moody's acknowledges that both solar projects experienced underperformance during the first months of operations and understands that such problem is partly related to the absence of a full service O&M contract in place during such time. In addition, we understand that there are pending maintenance items identified after construction completion and that Atlas, the project's sponsor, has designed a recovery plan with Ingener. Moody's observes that until the recovery plan is completely implemented, production levels will not reach their full estimated potential.

In relation to financial metrics, the financial model is designed to achieve an average senior debt service coverage ratio (SDSCR) of 1.40 times under a P90 (10-year) generation scenario (1.27 times for total debt). Moody's case considers a P90 (10-year) generation assumption, lower inflation, higher degradation levels, higher O&M contract renewal price and a more conservative view of the effect of the recovery plan on production amounts. Under such scenario, the SDSCR averages 1.26 times (1.14 times for the total debt DSCR). These metrics reflect a relatively high leverage for the rating category that we expect to be partially mitigated by the stable nature of the cash flows anticipated over the life of the transaction.

The notching applied between the senior and subordinated debt ratings incorporates the existence of a distribution test that could stop payments of the subordinated debt should the SDSCR in any year be below 1.20 times. While the existence of a twelve month debt service reserve account mitigates default risk, the two notch difference in the ratings between the senior and the subordinated notes reflect this potential restriction on cash flows for the subordinated debt.

The projects benefit from standard project finance protections including a 1st lien on assets, a cash flow waterfall, limitations on the incurrence of additional debt, and a distribution test. In addition to those standard features, the projects benefit from additional liquidity in the form of a senior debt service reserve account ( SDSRA) sized to twelve months of debt service, a credit positive relative to similar rated projects in Uruguay. In addition, the projects benefit from defined termination payment provisions within the PPAs, a credit positive.

Finally, Moody´s views that the presence of IDB Invest as lender of record is positive for bondholders by helping ensure a strong governance around the project's reporting and overall execution.

The stable outlook considers our expectation of stable and predictable cash flows derived from long term PPAs. The stable outlooks incorporate our view of a Senior DSCR in the range of 1.20 to 1.35 times.

Factors that Could Lead to an Upgrade

Given the stable nature of the payments under the PPAs and the expected level of the Senior DSCR, there is limited potential for the rating to be upgraded over the rating horizon. Nevertheless, higher than anticipated energy production leading to a Senior DSCR above 1.40 times could create positive pressure on ratings.

Given the close linkages between the off-taker and the government of Uruguay, a rating upgrade of the sovereign would also be an important rating consideration.

Factors that Could Lead to a Downgrade

Given the project's strengths and anticipated cash flow stability, a near-term rating downgrade is unlikely. However, an unforeseen reduction of cash flows or operational problems that lead to a Senior DSCR below 1.2 times for an extended period could exert downward pressure on the rating. Similarly, a rating downgrade of the sovereign or perceived deterioration in the credit quality of the off-taker could also exert negative rating pressure.

The project's sponsor is Atlas Renewable Energy Spain, S.L.U., ("Atlas" or "Atlas Renewable Energy") a Latin-American renewable power generation company founded in 2017 through the acquisition of SunEdison Latin American assets by Actis LLP ("Actis"), a private equity fund manager with $ 9 billion assets under management mostly in emerging markets. Actis' energy funds are entirely focused on power distribution and power generation and has a current portfolio of some 800MW, considering projects in operation, under construction and contracted. Atlas is headquartered in Santiago, Chile.

The issuers of the notes Naranjal/Litoral Issuer 1 and Naranjal/Litoral Issuer 2 are two special purpose vehicles, established solely for the purpose of issuing the senior and subordinated B Notes to fund the senior B loan participation and the subordinated B loan participation, per the participation agreement with the Inter-American Investment Corporation ("IDB Invest"), the lender of record. The proceeds from the notes will be provided by IDB Invest to Colidim S.A. and Jolipark S.A., the borrowers, which are wholly owned by Atlas and indirectly by Actis.

The principal methodology used in these ratings was Power Generation Projects published in May 2017. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

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.

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.

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 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.

Daniela Cuan
Vice President - Senior Analyst
Project Finance Group
Moody's Latin America ACR
Ing. Butty 240
16th Floor
Buenos Aires City C1001AFB
Argentina
JOURNALISTS: 800 666 3506
Client Service: 1 212 553 1653

Michael J. Mulvaney
MD - Project Finance
Project Finance Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
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JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
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