By John Wiske
& Julio Ugueto
NEW YORK -- Fitch Ratings has downgraded Corporacion Electrica Nacional S.A.'s (CORPOELEC) Long-Term (LT) Foreign Currency Issuer Default Rating (IDR) to 'C' from 'CC', and affirmed its LT Local Currency IDR at 'CC'.
The rating action also affects the company's senior unsecured notes' rating, which has been downgraded to 'C'/'RR4' from 'CC'/'RR4'. Additionally, Fitch has affirmed CORPOELEC's LT National rating at 'CCC(ven)' and the Short-Term National Scale rating at 'C(ven)''.
CORPOELEC's downgrade is linked to Fitch's recent downgrade of Venezuela's LT Foreign Currency IDR to 'C', following the announcement by the authorities on November 3 that they intend to pursue a renegotiation of the country's sovereign external debt obligations. Coupled with the previously missed payments on outstanding sovereign bonds that are currently within their 30-day grace periods, a default event appears highly probable.KEY RATING DRIVERS
Ratings Linked to Sovereign: CORPOELEC's ratings are linked to that of the Republic of Venezuela, reflecting the sovereign's ownership of the issuer, and CORPOELEC's dependence on current public transfers (39% of total revenues as of December 2016) to carry out its day-to-day operations, other public transfers to finance its investment needs, and transfers to third parties on its behalf to meet its financial obligations.
Monopolistic Position: CORPOELEC is a vertically integrated public utility responsible for the operation of the country's electricity sector. The company was created in 2007 when the government nationalized the electricity sector. The entity absorbed all of the country's generation assets along with transmission, distribution and electric power retail infrastructure during 2010-2011. CORPOELEC had an installed capacity of 29,180MW and a client base of 6.4 million users as of December 2016 (28,998 MW in fiscal year [FY] 2015).
Results Affected by Tariff Lag: The government implemented tariff adjustments during 2013-2015, resulting in a 29.8% increase in 2015 over the prior year. No adjustments were made to the tariff structure in 2016, while the company implemented a tariff increase of 142.5% in February 2017. The issuer continued to post a large operational deficit during FY 2016, despite the price adjustments, demonstrating that current prices for electricity do not allow for cost recovery and prolong dependence on the government's current and capital transfers for its day-to-day operations.
Fitch expects CORPOELEC's dependence on public funding to remain unchanged, preserving the linkage to the sovereign. CORPOELEC's EBIT (presented by management in its interim figures) was negative VEB166 billion measured at constant prices, a figure that includes current public transfers accounted for as revenues of VEB147 billion, equivalent to 39% of total revenues in FY 2016.
Sovereign Funds Capex: CORPOELEC used USD1 billion in capex during 2016, a substantially lower investment outlay than in 2014-2015 (USD2.6 billion in 2015 and USD4.1billion in 2014). The low level of additional capex and the progress of ongoing capex execution funded with public transfers allowed CORPOELEC to incorporate 870MW of new capacity and re-establish 3,340 MW to the national electric system in 2016.
Poor Quality of Information: The company is expected to make available a first draft of the auditor notes of its 2016 consolidated financial statements sometime during the second half of 2017. Previously, the auditor (Deloitte) could not issue an opinion on the reasonability of 2015 statements, given the weaknesses observed in the administrative control environment and lack of accounting support to establish an opinion on key components of the company's financial statements. According to management, 2016 statements will carry a similarly qualified opinion, with a marginal improvement at best over 2015 statements in terms of the number of issues raised.DERIVATION SUMMARY
CORPOELEC's LT Foreign- and Local-Currency IDRs are not well positioned relative to peers as a result of insufficient cost recovery which is explained by a continuing tariff lag that impedes a sustainable CFFO performance, especially when compared with peers such as Comision Federal de Electricidad (CFE) and Instituto Costarricense de Electricidad ICE.
CORPOELEC depends on public fund transfers from its parent to carry out its day-to-day operations, meet its financial obligations and finance its capital expenditure. Specifically, the company's 2018 bond financial obligations are paid by the central government, through the Ministry of Finance's Public Credit Office, which transfers the funds directly to the paying agent (Citi Bank).KEY ASSUMPTIONS
Fitch's key assumptions include:
- Maintenance of the tariff lag further consolidates the sovereign linkage, as Fitch expects the company's dependence on current and capital transfers to continue.
- The company continues to depend on transfers from the central government to meet its financial obligations.
CORPOELEC's 'C' rating suggests that default is imminent. If a default or restructuring occurs, Fitch anticipates average recovery for CORPOELEC's bondholders of 31%-50%, likely closer to the lower end of the range. Fitch's recovery analysis yields a Recovery Rating commensurate with an average recovery of 50%, but the willingness of Venezuela's government to extend concessions to investors will likely move actual recovery closer to the lower end of the 31%-50% range.RATING SENSITIVITIES
Future Developments That May, Individually or Collectively, Lead to Positive Rating Action
-Positive rating action is unlikely at this time. However, an upgrade of the sovereign would lead to an upgrade of CORPOELEC'S ratings.
Future Developments That May, Individually or Collectively, Lead to Negative Rating Action
-A downgrade of the sovereign, the announcement of a debt restructuring, and/or government failure to honor its financial obligations.LIQUIDITY
Liquidity is determined by timely access to government transfers that allow CORPOELEC to meet operating costs, finance its capex and meet its financial obligations. The company's liquidity is expected to be pressured over the next 12 months as a result of the sizable foreign-currency denominated payments of USD650 million due April 2018.FULL LIST OF RATING ACTIONS
Corporacion Electrica Nacional S.A.
--Long-Term Foreign Currency IDR downgraded to 'C' from 'CC';
--Long-Term Local Currency IDR affirmed at 'CC';
--EDC's USD650 million senior unsecured bond issuance due 2018 downgraded to 'C/RR4' from 'CC/RR4';
-- National Long-Term Rating affirmed at 'CCC(ven)';
-- National Short-Term Rating affirmed at 'C(ven)' .