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Rating Action:

Moody's changes the outlook of Gener to negative from stable; affirms Baa3 rating

01 Aug 2017

Approximately US$1,300 million debt securities affected

New York, August 01, 2017 -- Moody's Investors Service (Moody's) affirmed the Baa3 senior unsecured and Ba2 junior subordinate ratings of AES Gener S.A. (Gener). Concurrently Moody's changed Gener´s rating outlook to negative from stable.

RATING RATIONALE

The change of Gener's outlook to negative from stable largely reflects the continued high level of uncertainty surrounding the development of the Alto Maipo (AM) hydro-electric 531 MW project.

On July 31st Gener announced that the project had entered in technical default following the termination of Constructora Nuevo Maipo S.A (CNM), one of the construction consortiums involved in the project. Alto Maipo continues to face significant construction challenges which directly or indirectly expose Gener to a number of credit negative developments, including additional potential cost overruns that, in turn, may require additional equity contributions.

The negative outlook also factors in the potential for other risks to emerge that could affect Gener as it seeks to resolve the challenges at the Alto Maipo project. While Moody's acknowledges the non-recourse nature of the project's debt, the negative outlook factors in potential reputational and legal consequences that could adversely affect Gener's leading position in Chile or could result in a material non-cash impairment's (book value of the project's long-lived assets approximates US$1.2 billion). To date, Gener's equity commitment to the project aggregates US$619 million (including an $83 million contribution still pending) which equals to around 22% of the company's total equity of US$2.8 billion end of March 2017. This is important because Gener's local bonds include a financial covenant to maintain minimum shareholder's equity of at least US$1.57 billion.

Alto Maipo's technical default was triggered by the termination of CNM, owing to contract breaches. Alto Maipo has taken control of the works assigned to CNM (equivalent to around one third of the project's scope) while it seeks a replacement. Concurrently, the excavation works are progressing at levels materially below the original expectations. As a result, Alto Maipo is likely to face additional delays and cost overruns that could exceed the April 2017 initial estimates of US$460 million. Based on the April 2017 cost overruns, we estimate that the project's cost approximates US$4,700/MW which already compares poorly with other hydro-electric projects recently completed in the region. Incremental cost overruns will further weaken the economics of this project, another credit negative for Gener.

The technical default prevents AM from disbursing additional funds under its US$1.3 billion committed non-recourse project credit facility (currently outstanding amount: US$613 million). We understand that the project's cash balance, includes US$73 million in bank guarantees collected in connection with the termination of CNM. Gener believes that the project's cash balance along with its pending contributions provides Alto Maipo with enough liquidity to satisfy any claims that could arise should the project be unable to continue.

The affirmation of Gener's Baa3 rating acknowledges its strong liquidity profile including US$503 million in cash end of March 2017 and its fully available US$230 million committed credit facility scheduled to expire in October 2018.

Factors that Could Lead to an Upgrade

Given the negative outlook, limited prospects exist for an upgrade of Gener's rating. An outlook stabilization could result after Moody's gains more certainty regarding the future of the project and potential implications for Gener's business risk profile and financial performance.

Factors that Could Lead to a Downgrade

Downward pressure could result if Moody's perceives further deterioration of Gener's business or credit profile following decisions related to the Alto Maipo project, including the requirement of additional contributions to the project funded with debt and the lack of a clear path to successfully complete the project without further significant delays. Gener's rating could be downgraded if we anticipate that Gener's debt/EBITDA and FFO/debt will remain above 4.0x and below 18%, respectively, after 2018. Gener's inability to maintain its long-term contracted operations, and/or if it re-contracts its load at prices significantly below US$60/MWh (2018 real prices) is also likely to trigger downward pressure on the rating.

The principal methodology used in these ratings was Unregulated Utilities and Unregulated Power Companies 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.

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 J. Mulvaney
MD - Project Finance
Project 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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