July 28, 2016 - 5:54 PM EDT
Print Email Article Font Down Font Up
Fitch Affirms Capex's Foreign Currency IDR at 'B'; Stable Outlook

Fitch Ratings has taken the following rating actions for Capex S.A. (Capex):

-- Long-Term Foreign Currency (LT FC) Issuer Default Rating (IDR) affirmed at 'B';

-- Long-Term Local Currency (LT LC) IDR upgraded to 'B+' from 'B'.

The Outlook is Stable.

Fitch has also affirmed the 'B/RR4' long-term rating for Capex's senior unsecured notes due 2018. The 'RR4' rating for the outstanding notes reflects an average expected recovery given default and is in line with the RR soft cap established for Argentina.

The upgrade of the company's LC IDR reflects the recent regulatory changes resulting in more favorable prices for electricity and natural gas and the company's deleveraging trajectory, which Fitch expects to continue. The LC IDR rating action also reflects recent end-users' tariff increases aimed at reducing the electricity sector financial deficit.

KEY RATING DRIVERS

Capex's ratings reflect the high regulatory risks associated with operating in the electricity sector in Argentina, which is improving as a result of the recent regulatory changes, foreign currency (FX) exposure (currency mismatch between peso-denominated cash flows and dollar-denominated debt), and the long-term need to pursue a robust capital expenditure plan to sustain the company's vertically integrated business model. Positively, in the last three fiscal years, Capex has seen slightly constructive regulatory moves by the Argentine government in the gas and electricity sectors. Such transformative reforms are needed in the Argentine electricity sector; otherwise the long-term financial viability of the sector remains uncertain.

Capex's 'B' LT FC IDR is constrained by the 'B' country ceiling of the Republic of Argentina (Fitch LC and FC IDRs of 'B'). Fitch's country ceiling of 'B' limits the FC rating of most Argentine corporates. Country Ceilings are designed to reflect the risks associated with sovereigns placing restrictions upon private sector corporates, which may prevent them from converting local currency to any foreign currency under a stress scenario, and/or may not allow the transfer of FC abroad to service FC debt obligations. Since taking power in December 2015, the Mauricio Macri administration removed FX controls introduced in 2011 and increased the flexibility of the Argentine peso, which should contribute to improving the capacity of the economy to absorb external shocks and relieve pressure on international reserves.

HIGH REGULATORY RISK

Capex's ratings reflect high regulatory risk given strong government influence in both the Electric/Utilities and Energy sectors. Capex operates in highly strategic sectors where the government both has a role as the price/tariff regulator and also controls subsidies for industry players. Electricity and gas prices remain sub-optimal compared with other countries in the region despite recent marked increases in tariffs for end-users of between 200% and 300%. The deficit between electricity tariffs and industry costs is funded through subsidies, which are dependent on public funding. In the electricity sector, Capex depends on payments from government agency Compania Administradora del Mercado Mayorista Electrico S.A. (CAMMESA). Payments from CAMMESA can be volatile given that this agency depends on the national government for funds to make these payments. Electricity subsidies and transfers have increased to approximately ARS140 billion in 2015 from ARS1.18 billion in 2005. The government has implemented changes in tariffs for the past few years. With the most recent tariff revision, the government aims to save USD4 billion per year.

SLIGHTLY POSITIVE REGULATORY CHANGES

Fitch believes the recent resolutions implemented by the new government reflect a trend of less government interference and discretion in the power generation sector. Capex has benefited from recent positive regulatory rulings in both the Oil & Gas and Electricity sectors.

In the Oil & Gas sector, the government stimulus plans to increase natural gas has resulted in increased tariffs. Currently, two price schemes for natural gas coexist: Res SEN 24/08 and Res 41/16. Under the Gas Plus program (Res SEN 24/08), upstream companies receive a base price for output along a base gas-production curve, and committed gas production in excess of this is remunerated at USD4.5/MMBTU-USD7.5/MMBTU. The benefits of the program are already tangible for Capex. For the fiscal year ended (FYE) April 2016, the company received approximately ARS257 million (USD23 million) related to the government stimulus plan resulting in a year-to-year increase of 78% in USD terms. Under a recently introduced scheme (Res 41/16), the government increased the prices for natural gas destined for power generation. For the Neuquen basin where the company operates, the increase was 106% to USD5.5/mmbtu. Both schemes are in place until the end of 2017.

In the electricity sector, during the last three years the government has adjusted the remuneration scheme for GenCos operating under Res SEN 95/13, which has assisted the company in improving its financial performance. Furthermore, the remuneration scheme was revised in February 2016 (Res 22/16) to improve the remuneration conditions of the GenCos selling at spot. This new revision adjusts upwards the remuneration of fixed expenses, nonrecurring O&M expenses, and variable costs (other than gas). Net-net, this new remuneration scheme would result in a close to 50% increase in tariffs for Capex compared with the previous year.

ADVANTAGEOUS VERTICAL INTEGRATION:

Capex is an integrated thermoelectric generation company whose vertically integrated business model gives it an advantage over other Argentine generation companies. Capex benefits from operating efficiencies as an integrated thermoelectric generating company and from the flexibility of having its own natural gas reserves to supply the plant. This gives the company an advantage against other players in the industry, especially given existing gas restrictions in the country. Capex's generating units are efficient, and the proximity to its natural gas reserves in the Agua del Cajon field coupled with gas transportation restrictions from the Neuquen basin to the main consumption area in Buenos Aires reduces the gas supply risk.

CAPITAL INVESTMENT NEEDS:

Fitch expects the company to invest approximately USD65 million in capital expenditures during the next 12 months, with the vast majority related to E&P in order to maintain reserves. The company reported proved reserves of 32 million barrels of oil equivalent (mmboe) at year-end 2015 (approximately 92% natural gas and 80% proved and developed), relatively flat compared with the previous year. Natural gas production remained relatively flat at 1.5 million cubic meters per day, with oil production increasing approximately 17% year over year, but still remaining negligible. Based on daily production of 9,560 BOE, the company's overall reserve life is nine years. The company's capex investment plan remains crucial as part of the vertical integration strategy of the company.

FINANCIAL IMPROVEMENT

In large part, due to the government's slightly improved regulations, the company has recorded improving financial metrics. On a dollar basis, for the FYE April 2016, Capex registered EBITDA of USD92.8 million, which is 40% higher than the previous year (USD66 million), mainly attributable to a higher volume of hydrocarbon sales that resulted in higher revenues associated to the natural gas stimulus plan, and higher natural gas prices. EBITDA margins reached a historical high of 56%. Fitch expects the company's EBITDA generation to range between USD85-USD90 million with EBITDA margins similar to those observed during the FYE April 2016.

KEY ASSUMPTIONS

Fitch's key assumptions within the rating case for Capex include:

-- Consistent double-digit currency depreciation per year; inflation in ARS of 30% in 2016 decreasing to 17% by 2019

-- Energy production to range between 3,800GWh/year and 4,000GWh/year;

-- Natural gas sales prices stabilizing at USD5.5 per million BTU;

-- Overall, EBITDA to average approximately USD100 million/year;

-- Leverage in the 2.0x-3.0x level during next three years.

RATING SENSITIVITIES

Capex's ratings could be negatively affected by a combination of the following:

-- Argentina's credit quality deterioration;

-- Given high dependence on the subsidies by CAMMESA from the Treasury, any further weakening of Argentina's fiscal accounts could have a negative impact on the company's collections/cash flow;

-- A significant deterioration of credit metrics; and/or

-- Sustained declines in gas reserves/production or failure to further develop new fields, which could threaten the integrated business model in the long-term.

An upgrade of Argentina's ratings and country ceilings may result in a positive rating action.

LIQUIDITY

Solid Liquidity and Improved Leverage: As of April 2016, the company's total debt was USD237 million, slightly lower than the USD250 million reported in the FYE April 2015. Capex's long-term debt is primarily composed of a USD200 million long-term bond with a March 2018 maturity date. As of April 2016, the company reported cash and equivalents totalling USD57 million versus short-term debt of USD21 million, giving the company one of the strongest liquidity profiles for Argentine corporates rated by Fitch. The company's leverage levels have steadily improved due to the company's improved financial performance, as leverage defined as Total Debt/EBITDA was 2.6x in 2016 vs. 3.8x in 2015 and 4.2x in 2013. Fitch expects for leverage to remain in the 3.0x-3.5x range for the next three years.

FULL LIST OF RATING ACTIONS

Fitch has taken the following rating actions:

Capex S.A.

-- Foreign currency IDR affirmed at 'B';

-- Local currency IDR upgraded to 'B+' from 'B';

-- International senior unsecured bond ratings affirmed at 'B/RR4';

The Rating Outlook for the IDRs is Stable.

Date of Relevant Rating Committee: July 27, 2016

Additional information is available on www.fitchratings.com.

Applicable Criteria

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 17 Aug 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869362

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form
https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1009672

Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1009672

Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

Fitch Ratings, Inc.
Primary Analyst
Cinthya Ortega, +1-312-606-2373
Director
70 W. Madison St.
Chicago, IL 60602
or
Secondary Analyst
John Wiske, +1-212-908-9195
Analyst
or
Committee Chairperson
Dan Kastholm, CFA, +1-312-368-2070
Managing Director
or
Media Relations, New York
Elizabeth Fogerty, +1-212-908-0526
[email protected]


Source: Business Wire (July 28, 2016 - 5:54 PM EDT)

News by QuoteMedia
www.quotemedia.com

Legal Notice