15 June, 2022
SAO PAULO (S&P Global Ratings) June 6, 2022--S&P Global Ratings took the rating action described above. The rating affirmation reflects our expectation that IERL will continue generating relatively predictable cash flows thanks to its long-term and dollar-denominated power purchase agreements (PPAs). That, combined with low maintenance capital expenditures (capex), manageable debt servicing needs, and discretionary dividends will allow the company to keep gross debt to EBITDA in the 4.5x-5.0x range and funds from operations (FFO) to gross debt at 12%-15% in the coming years, aligned with our assessment of an aggressive financial risk profile.
We do expect delays from ENEE will result in higher working capital needs in 2022. However, we still view the liquidity position as adequate because of the following factors:
The payment delays from ENEE are attributable to the difficult financial situation of Honduras' energy sector due to high energy losses and delinquency rates, which the government is trying to address with an energy reform in the country, which includes bilateral negotiations of PPAs with private generators. This is still ongoing, and we're monitoring how it will affect IERL's PPAs in Honduras and the company's credit metrics. As a mitigating factor, IERL benefits from insurance that covers breach of contracts and expropriation in Honduras, provided by Multilateral Investment Guarantee Agency (MIGA), which we believe it would use only as a last resort.
IERL's term loan agreement includes maintenance financial covenants measured by gross debt to EBITDA of up to 5.25x in 2022, 5.20x in 2023, 5.15x in 2024, 5.0x in 2025, 4.8x in 2026, and 4.65x in 2027. If IERL breaches them, it would trigger an event of default. We're amending the covenant calculation because in our last report, published on June 18, 2021, we stated that the covenants were calculated on a net debt basis. Although we forecast tight covenant headroom of about 10% in the next couple of years--considering IERL's gradual deleveraging following the scheduled amortization of the term loan, and while the covenant's threshold narrows--we don't expect the company to breach them.
IERL's business risk profile reflects its smaller scale than that of peers and its exposure to high country risk in Central America, especially Guatemala (foreign currency: BB-/Positive/B), Honduras (BB-/Stable/B), Costa Rica (B/Stable/B), and Nicaragua (B-/Stable/B). These factors partly offset the attractive terms of IERL's dollar-denominated contracts, which have an average remaining term of about 13 years. Although there's some concentration among its off-takers, which are some of the largest electricity distributors in Central America, they're required to buy almost all the energy that IERL's assets generate, in line with the PPA terms.
We also consider the company's good diversification by asset type and its favorable location. IERL has 818.5 megawatts (MW) of installed capacity through 11 assets in six jurisdictions, and 40% of its installed capacity is hydro, 39% is wind, and 21% is solar. In our view, this allows for more stable cash flows, because hydro and wind generation typically show historically negative correlation. Also, the location of its assets allows IERL to post net capacity factors of 40%-43%. We view these factors, along with the company's relatively new and efficient asset base, as rating strengths because they allow IERL to post EBITDA margins in the 55%-60% range, which are higher and more stable than the regional peers' margins of 40%-50%.
ESG credit indicators: E-1, S-3, G-3
Environmental factors are a positive consideration in our credit rating analysis of IERL, which operates exclusively in renewable generation. The company plays an essential role in countries that are promoting the transition to unconventional renewables to replace existing carbon-based technologies. We believe that the company is diversified in terms of asset type (40% of EBITDA comes from hydro run-off river dams, 40% from wind assets, and 20% from solar farms), supporting stable cash flows.
Social and governance factors are moderately negative considerations due to IERL's exposure to high-risk jurisdictions, such as Guatemala and Honduras, given their weak institutional frameworks and problems related to income inequality. Nevertheless, these risks are partly offset by IERL's expertise in developing renewable energy in Central America and its ability to deal with several regulatory authorities.
Certain terms used in this report, particularly certain adjectives used to express our view on rating relevant factors, have specific meanings ascribed to them in our criteria, and should therefore be read in conjunction with such criteria. Please see Ratings Criteria at www.standardandpoors.com for further information. Complete ratings information is available to subscribers of RatingsDirect at www.capitaliq.com. All ratings affected by this rating action can be found on S&P Global Ratings' public website at www.standardandpoors.com. Use the Ratings search box located in the left column.
European Endorsement Status Global-scale credit rating(s) have been endorsed in Europe in accordance with the relevant CRA regulations. Note: Endorsements for U.S. Public Finance global-scale credit ratings are done per request. To review the endorsement status by credit rating, visit the spglobal.com/ratings website and search for the rated entity.
No content (including ratings, credit-related analyses and data, valuations, model, software or other application or output therefrom) or any part thereof (Content) may be modified, reverse engineered, reproduced or distributed in any form by any means, or stored in a database or retrieval system, without the prior written permission of Standard & Poor’s Financial Services LLC or its affiliates (collectively, S&P). The Content shall not be used for any unlawful or unauthorized purposes. S&P and any third-party providers, as well as their directors, officers, shareholders, employees or agents (collectively S&P Parties) do not guarantee the accuracy, completeness, timeliness or availability of the Content. S&P Parties are not responsible for any errors or omissions (negligent or otherwise), regardless of the cause, for the results obtained from the use of the Content, or for the security or maintenance of any data input by the user. The Content is provided on an “as is” basis. S&P PARTIES DISCLAIM ANY AND ALL EXPRESS OR IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE, FREEDOM FROM BUGS, SOFTWARE ERRORS OR DEFECTS, THAT THE CONTENT’S FUNCTIONING WILL BE UNINTERRUPTED OR THAT THE CONTENT WILL OPERATE WITH ANY SOFTWARE OR HARDWARE CONFIGURATION. In no event shall S&P Parties be liable to any party for any direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, or losses (including, without limitation, lost income or lost profits and opportunity costs or losses caused by negligence) in connection with any use of the Content even if advised of the possibility of such damages.Credit-related and other analyses, including ratings, and statements in the Content are statements of opinion as of the date they are expressed and not statements of fact. S&P’s opinions, analyses and rating acknowledgment decisions (described below) are not recommendations to purchase, hold, or sell any securities or to make any investment decisions, and do not address the suitability of any security. S&P assumes no obligation to update the Content following publication in any form or format. The Content should not be relied on and is not a substitute for the skill, judgment and experience of the user, its management, employees, advisors and/or clients when making investment and other business decisions. S&P does not act as a fiduciary or an investment advisor except where registered as such. While S&P has obtained information from sources it believes to be reliable, S&P does not perform an audit and undertakes no duty of due diligence or independent verification of any information it receives. Rating-related publications may be published for a variety of reasons that are not necessarily dependent on action by rating committees, including, but not limited to, the publication of a periodic update on a credit rating and related analyses. To the extent that regulatory authorities allow a rating agency to acknowledge in one jurisdiction a rating issued in another jurisdiction for certain regulatory purposes, S&P reserves the right to assign, withdraw or suspend such acknowledgment at any time and in its sole discretion. S&P Parties disclaim any duty whatsoever arising out of the assignment, withdrawal or suspension of an acknowledgment as well as any liability for any damage alleged to have been suffered on account thereof. S&P keeps certain activities of its business units separate from each other in order to preserve the independence and objectivity of their respective activities. As a result, certain business units of S&P may have information that is not available to other S&P business units. S&P has established policies and procedures to maintain the confidentiality of certain non-public information received in connection with each analytical process. S&P may receive compensation for its ratings and certain analyses, normally from issuers or underwriters of securities or from obligors. S&P reserves the right to disseminate its opinions and analyses. S&P's public ratings and analyses are made available on its Web sites, www.spglobal.com/ratings (free of charge), and www.ratingsdirect.com(subscription), and may be distributed through other means, including via S&P publications and third-party redistributors. Additional information about our ratings fees is available at www.spglobal.com/usratingsfees.
If you have any questions or comments, please contact us at [email protected]