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Rating Action:

Moody's upgrades AES' CFR to Ba2 from Ba3; stable outlook

Global Credit Research - 15 May 2017

Approximately $4.5 billion of debt securities affected

New York, May 15, 2017 -- Moody's Investors Service, ("Moody's") today upgraded The AES Corporation's (AES) ratings, including the Corporate Family Rating (CFR) and senior unsecured rating to Ba2 from Ba3. Concurrently, Moody's assigned a Ba1 senior secured rating to AES' planned new $525 million Term Loan B. AES' Speculative Grade Liquidity Rating of SGL-2 was affirmed. The outlook is stable. AES plans to use the proceeds raised in connection with the execution of the Term Loan B to repay its $517 million Trust Notes as well as for general corporate purposes.

RATINGS RATIONALE

The upgrade of AES' ratings reflects our expectation that AES' holdco-only and consolidated key credit metrics will continue to improve and become better positioned within the Ba-rating category. Specifically, we expect that its parent-only cash flow from operations (POCF) to holdco-only debt and consolidated funds from operations (FFO) to debt will both exceed 14%.

The improvement of the parent only metrics is largely driven by AES' use of internally generated cash flow, along with proceeds from non-core asset sales (for example, from the AES Sul disposal: $300 million), to fully fund the holdco-debt prepayment, including $341MM during 1Q2017; as well as the acquisition of a 50%-ownership stake in sPower ($382 million); other equity contributions; and dividend payments (target: 8%-10% average annual growth). The improvement in parent only cash flow is further underpinned by AES' $400 million 2012-2020 cost savings program (2017: $50 million) and its reduced interest payments as its holdco-debt progressively declines which will not represent more than 23% of the consolidated debt.

Moody's expectation that the consolidated key credit metrics will become better positioned within the Ba-rating category over the medium-term also factors in AES' projects scheduled amortization along with the planned deconsolidation of Eletropaulo Metropolitana - Eletricidade de São Paulo S.A. (Eletropaulo; Ba3 stable; interest stake: 17%) which will reduce the consolidated debt by around $1 billion. It also considers the progressive debt-reduction at DPL Inc. (Ba3, negative; total debt year-end 2016: $1.9 billion) should the Ohio Commission approve the multi-party settlement agreement executed in March 2017. This reduction in consolidated debt will help offset the impact of the increased financial leverage to fund key growth projects until they start generating cash flows following their scheduled completion in the 2017-2021 period. These assets include AES' 50.1% stake in the combined cycle and liquefied natural gas regasification projects in Panama (total debt: nearly $500 million; outstanding at year-end 2016: $180 million) as well as the 1,384 MW Southland repowering project. Moody's also expects that AES will not consolidate its 50% interest in sPower after the completion of that acquisition (outstanding debt nearly $680 million) and that AES Gener's (Baa3 stable; interest stake: 66.7%) consolidated scheduled project debt amortization, along with additional corporate debt repayments, will help to partially offset the increased project debt (+$950 million) associated with the 531MW Alto Maipo hydro-electric project until its commissioning in 2019.

The upgrade of AES' CFR to Ba2 also factors in the group's progressive improvement in its business risk profile as it plans to exit the merchant power generation business, including DPL's plans to divest its coal-fired units and the recent disposal of the coal-fired assets in Kazakhstan. It also considers that the long-term US$-denominated contracts of its growth initiatives in natural gas, renewables and battery-storage will help enhance the group's cash flow visibility.

The stable outlook reflects our expectation that financial metrics will gradually improve despite the execution risk and challenges inherent in AES' growth strategy, particularly with regard to construction risk in light of the delays faced at Alto Maipo and Indianapolis Power & Light Company's (Baa1 stable) Eagle Valley natural gas combined cycle plant. The stable outlook captures the benefits of the group's size and scale as well as its operational and geographic diversity as evidenced by the ability of non-core subsidiaries' dividends to offset the reduced distribution from some core subsidiaries (including Gener). The stable outlook acknowledges AES' successive exit of several non-core emerging markets but considers that AES is still exposed to several non-investment grade countries.

Outlook

AES' liquidity remains adequate and its speculative grade liquidity rating of SGL-2 reflects good liquidity prospects for the next twelve months. The SGL-2 factors in our expectation that AES will use its positive parent free cash flow (expected to range between $575-$675 million) in 2017 along with cash (target balance at year-end 2017: $50 million) and net proceeds from asset sales (2017: $800 million; including $300 million from the sale of Sul) to fund all of its capital requirements. These include its equity contributions (2017: $350 million), its 50% share in the acquisition of sPower ($382 million) and holdco-debt repayment ($341 million). The SGL-2 assumes limited borrowings under its $800 million committed revolving credit facility which was recently extended to 2021 (from July 2018). During 2017, AES has borrowed around $127 million under the facility (no amounts outstanding at year-end 2016) but plans to repay most of it later this year. The SGL-2 also anticipates that AES' will maintain substantial headroom with its two financial covenant requirements: a minimum parent operating cash flow coverage and a maximum level of recourse debt relative to cash flow. Excluding non-recourse maturities, AES does not have any major debt maturities until 2019.

Factors that Could Lead to an Upgrade

An upgrade of the rating could be considered if progress is achieved in successfully executing the group's material growth initiatives, if AES' holdco debt continues to decline as a percentage of total consolidated debt, and if consolidated key credit metrics continue to improve such that we expect that its POCF to holdco-debt and Consolidated FFO to debt will exceed 16%, respectively, on a sustained basis.

Factors that Could Lead to a Downgrade

Material challenges in the group's construction program in terms of delays and/or cost overruns or if the group's business risk profile is weaker than currently anticipated could result in rating downgrade. Negative momentum is also likely if AES' parent-only and consolidated metrics do not progressively improve over the next few years such that they become better positioned within the Ba-rating category; including POCF to debt and consolidated FFO to debt below 12%, respectively, on a sustained basis.

The principal methodology used in these ratings was Unregulated Utilities and Unregulated Power Companies published in October 2014. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

The AES Corporation is a globally diversified power holding company that owns a portfolio of electricity generation and distribution businesses in 17 countries. AES' assets are largely financed on a non-recourse basis and include a combination of regulated utilities as well as merchant and contracted generating facilities. In total, AES has ownership interests in approximately 35,000 MW of generating capacity across the globe and serves retail customers via its distribution subsidiaries in three countries.

Upgrades:

..Issuer: AES Corporation, (The)

.... Probability of Default Rating, Upgraded to Ba2-PD from Ba3-PD

.... Corporate Family Rating, Upgraded to Ba2 from Ba3

....Senior Unsecured Regular Bond/Debenture, Upgraded to Ba2 (LGD4) from Ba3 (LGD4)

..Issuer: AES Trust III

....Backed Pref. Stock Preferred Stock, Upgraded to B1 (LGD6) from B2 (LGD6)

Assignments:

..Issuer: AES Corporation, (The)

....Senior Secured Term Loan B, Assigned Ba1 (LGD2)

Outlook Actions:

..Issuer: AES Corporation, (The)

....Outlook, Changed To Stable From Positive

Affirmations:

..Issuer: AES Corporation, (The)

.... Speculative Grade Liquidity Rating, Affirmed SGL-2

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

Jim Hempstead
MD - Utilities
Infrastructure 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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