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Global Credit Research - 18 Mar 2011
Approximately US$300 million of debt securities affected
New York, March 18, 2011 -- Moody's Investors Service has assigned a B1 Corporate Family Rating
(CFR) and a FC B1 senior unsecured debt rating on the Global Scale to
Inkia Energy Ltd's (Inkia) planned issuance of up to US$300
million of senior unsecured notes to be issued under a 144(A) registration.
This is the first time Moody's has rated Inkia. The rating
outlook is stable.
The B1 CFR and senior unsecured debt rating reflects our assessment of
Inkia's historical and projected consolidated credit metrics,
which we believe position the company at the upper end of the B-rating
category for unregulated power companies. Over the last three years,
Moody's calculates that the company's cash flow before working
capital changes (CFO pre-W/C) and cash flow coverage of interest
expense were below 12% and 3.0x, respectively,
while the company experienced negative free cash flow due principally
to various capital investment programs. Prospectively, Moody's
believes that these financial metrics will trend downward through 2012,
as the company completes its multi-year construction program at
Kallpa, a Peruvian based generation subsidiary, which is converting
its existing open-cycle natural gas facility (consisting of three
turbines) to a combined-cycle plant configuration (CC conversion).
The company anticipates the CC conversion will be completed during 2012
which should not only improve the plant's operating efficiency but
also its competitive position in the Peruvian power market. Over
this timeframe of continuing negative free cash flow, we anticipate
that the ratio of CFO pre-W/C to debt will average in the mid-to-high
single digits with CFO pre-W/C coverage of interest expense of
approximately 2.5x. Moody's notes that Inkia has committed
subsidiary level financing arrangements at the Kallpa level, which
will help fund this negative free cash flow.
While the rating incorporates the importance of the Peruvian subsidiaries
including not only the future expected cash flows from Kallpa but also
from its 21.1% economic interest in Edegel, the largest
generator in Peru, the rating also acknowledges the asset concentration
that exists at Kallpa which is somewhat balanced with the geographic diversity
of Inkia's cash flow stream from its investments in other Latin
American and Caribbean countries. The rating recognizes the predictability
of Kallpa's future cash flows, which is underpinned by the
existence of Power Purchase Agreements (PPAs) for the bulk of its available
energy that include certain cost indexation clauses, which help
to mitigate the impact of substantial variations in certain costs such
as fuel that the company may experience over the life of the PPAs.
The B1 rating also considers the degree of structural subordination that
exists at Inkia as a holding company and its full reliance on its subsidiaries'
dividend distributions to service its debt. In particular,
the rating points to the fact that Kallpa, the most important Inkia
subsidiary, is not anticipated to provide dividends to Inkia while
the CC conversion is being completed, and that Inkia's access
to cash payouts from its other prominent cash flow contributor,
Edegel, is limited until the outstanding bonds of its indirect intermediate
parent holding-company subsidiary, Southern Cone Power Peru
S.A. (SCPP) become due in 2012. Therefore,
Inkia bondholders will further rely over the near to medium term upon
dividends for debt service and other holding company obligations from
a variety of smaller subsidiaries. While annual holding company
needs are expected to be relatively modest and we anticipate internal
sources of holding company liquidity to remain adequate, the increased
reliance on the smaller and less predictable subisidaries for debt service
over this timeframe is a constraining factor in this rating assignment.
Beginning in 2013, Moody's anticipates SCPP and Kallpa will
be able to provide meaningful cash flow contributions to the parent beginning
in 2013, once Kallpa's CC conversion is completed and SCPP's
The B1 rating further considers the company's fairly sizeable growth
and development strategies currently centered around the construction
of Cerro del Aguila (Cerro), a 402 megawatt (MW) hydro project,
planned to be completed in 2015. While the company's future
performance may benefit from the construction of this cost-competitive
asset, we observe that Inkia's management has limited project
development expertise, particularly as it relates to the construction
of a multi-year hydro project. Moreover, Moody's
has limited insights into other potential investment projects that Inkia's
management may pursue outside of the Cerro project.
The rating acknowledges Inkia's parent company Israel Corporation's
(IC) sizeable capital commitment to help fund Inkia's growth and
development; however, such support is balanced by our understanding
of the terms and conditions of the shareholder loans between IC and Inkia,
which we consider to be somewhat akin to subordinated debt-like
obligations in our rating assessment of Inkia. That being said,
we observe that the terms and conditions of the unsecured notes limit,
among others things, the incurrence of additional debt and place
restrictions on payments to the shareholder (both dividends and payments
under the shareholder loans) which enhances Inkia's financing flexibility,
particularly through 2012.
Proceeds of this offering are expected to be used for the repurchase of
Inkia's outstanding Nuevos-soles 9.25% senior
secured bonds due in 2015 (about US$82.8 million),
for working capital purposes, to finance its expected equity contribution
in Cerro and for other projects and acquisitions that the company may
pursue in the future.
Moody's has reviewed preliminary draft legal documentation for the
proposed senior unsecured notes and the assigned rating assumes that there
will be no material variation from the draft reviewed and that all agreements
will be legally valid, binding and enforceable.
The stable rating outlook reflects our opinion that Inkia's rating
is likely to remain well positioned within the B-rating category
based upon our expectations for future consolidated credit metrics over
the next few years, particularly, with the CC conversion project
well underway at Kallpa, the related dividend limitations that are
expected to persist during this timeframe, and an anticipated increase
in consolidated indebtedness associated with the funding of new growth
projects such as Cerro.
Inkia's ratings could see some positive momentum after completion
of the CC conversion expansion and receipt of some steady dividend distributions
from this critical subsidiary.To that end, once the Kallpa
CC conversion nears completion, a positive rating action could surface
if, as we expect, Inkia's consolidated credit metrics
(including any new project finance debt) improve such that cash flow coverage
of interest expense, cash flow to debt and retained cash flow (RCF)
to achieve levels in excess of 2.5x, 13% and 8%,
respectively, on a sustainable basis. Additionally,
any improvement in Inkia's consolidated financial performance will
be balanced against our assessment of the company's growth and development
initiatives underway at that time.
Complications in the completion of Kallpa's combined cycle expansion
program, and/or political or operational problems at some of the
other key subsidiaries that result in a material deterioration in the
anticipated dividend distributions to Inkia and/or in the consolidated
credit metrics could put downward pressure on the ratings. Specifically,
if Inkia reports consolidated cash flow to debt, and RCF to debt
below 7% and 3%, respectively, and cash flow
interest coverage of less than 1.5x, on a sustainable basis.
The principal methodology used in rating Inkia was the Unregulated Utilities
and Power Companies methodology (August 2009). Other methodologies
and factors that may have been considered in the process of rating this
issuer can also be found in our website www.moodys.com.
Headquartered in Lima, Peru, Inkia is an international holding
company incorporated in Bermuda that holds ownership stakes in power generation
companies in Peru (Government bond rating: Baa3, stable),
Bolivia (Government bond rating: B1, positive), Dominican
Republic (Government bond rating: B1, stable), El Salvador
(Government bond rating: Ba1, negative), Jamaica (Government
bond rating: B3, stable) and Panama (Government bond rating:
Baa3, stable). Inkia has net ownership of 1,191MW (adjusted
to account for its proportional ownership interest) of effective generation
capacity. At year-end 2010, Inkia reported consolidated
assets of around US$1.2 billion and cash flow from operations
of around US$104 million.
Information sources used to prepare the credit rating are the following:
parties involved in the ratings, parties not involved in the ratings,
public information, confidential and proprietary Moody's Investors
Service information, and confidential and proprietary Moody's
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
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Please see the ratings disclosure page on our website www.moodys.com
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of each rating category and the definition of default and recovery.
Infrastructure Finance Group
Senior Vice President
Infrastructure Finance Group
Moody's Investors Service
Moody's Investors Service
Moody's assigns first-time B1 rating to Inkia Energy
250 Greenwich Street
New York, NY 10007
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