Fitch Ratings - New York - 23 Mar 2022: Fitch Ratings has affirmed Investment Energy Resources Limited's (IERL) Foreign and Local Currency Long-Term Issuer Default Ratings (IDRs) at 'BB-'. Fitch also affirmed the senior secured green bonds at 'BB-'. The Rating Outlook is Stable.   The ratings reflect IERL's diversified portfolio of generation assets that span across Central America, mostly notably in Guatemala (BB-/Stable), which Fitch estimates cash flow from Guatemala sufficiently supports its cash flow profile and slightly offsets the company's high off-taker risk tied to governments in lower rated operating environments, such as El Salvador (CCC) and in Nicaragua (B-/Stable).  

KEY RATING DRIVERS

  High Off-Taker Risk: IERL's ratings reflect the company's high off-taker risk, where 46% of its revenues come from off-takers with a weighted average credit quality in line with a 'B+' rating. As of Dec. 31, 2021, 40% of consolidated revenues originated from contracts signed with distribution companies in Guatemala; 22% from Empresa Nacional de Energia Electrica (ENEE; not rated) in Honduras, 19% from Instituto Costarricense de Electricidad (ICE; B/Stable) in Costa Rica (B/Stable), 6% from contracts signed with distribution companies in Nicaragua (B-/Stable) and 3% in the Dominican Republic. As a contingent measure, IERL has the Multilateral Investment Guarantee Agency's insurance, which offers political risk insurance and enhancement guarantees on its generation assets in Honduras and Nicaragua.   Diversified Business Portfolio: IERL's diversified portfolio of renewable generation assets across Central America offset the idiosyncratic risk tied to government supported off-takers in lower rated environments and stabilize cash flow across technologies mitigating the risks of low hydrology or unfavorable wind conditions. The company has a portfolio of 818MW generation assets: 39% of which are hydroelectric plants, 21% solar (including 50% stake in the solar farms Bosforo -- 100MW -- and Cuscatlan Solar -- 10MW, both JVs with AES in El Salvador), and 40% in wind assets. The company's ratings are capped by the country ceiling of Guatemala   Predictable Cash Flows: IERL has predictable cash flows supported by long-term U.S. dollar-denominated contracts, and a low fixed marginal cost of production, given its concentration in renewables. As of YE 2021, the company's generation capacity was 93% contracted under power purchase agreements (PPAs) with a weighted average remaining life of approximately 13 years. Off-taker for the take-or-pay contracts are obligated to purchase 100% of generation. According to preliminary data, IERL's revenues were USD320 in 2021 (8% up compared to 2020), and EBITDA increased by 7% to USD187 million compared to 2020. Fitch's base case reflects that energy production will be close to 2.8GWh in 2022, assuming a blend of P50 and P90 scenarios for the solar and wind projects, and capacity factors that reflect historical average hydrology conditions in the case of Renace and Santa Teresa. Revenues under these assumptions may amount to USD322 million while EBITDA may reach approximately USD197 million in 2022.   Improving Leverage Profile: IERL's liability management exercise in 2021 materially improved its leverage profile. As of YE 2021, gross leverage, measured by total debt/EBITDA, was estimated to be 5.3x according to preliminary figures (2020: 6.2x). Fitch expects IERL's leverage to be close to 5.0x by end of 2022 and to deleverage toward 4.7x in 2024. The deleveraging trajectory is supported by the loan's programmed amortization schedule of about USD30 million per year, and by average annual EBITDA of approximately USD197 million between 2022 and 2024. Additionally, average FFO interest coverage may reach 3.0x between 2022 and 2024.   Strong Shareholder Group: IERL benefits from the strength of Corporacion Multi Inversiones (CMI) group of companies. CMI is a family-owned multinational conglomerate and one of the largest in Central America, with operations in 14 countries including the Caribbean and the U.S. Its operations span agribusiness, restaurants (including the global chain Pollo Campero), real estate, electricity generation and finance. CMI has shown commitment to developing its energy business unit and has made significant investments in this industry, while providing back-office support and access to credit to CMI Energia.

DERIVATION SUMMARY

IERL's 'BB-' reflects the company's diversified and complementary asset portfolio supported by exceptionally long-term U.S. dollar-denominated contracts, which mitigates its exposure to weak off-takers in challenging operating environments. Compared to AES Panama Generation Holdings, S.R.L. (AESPGH) (BBB-/Stable), IERL has a lower scale of operations but a better geographic diversification, which AESPGH compensates with a better off-taker risk profile, and both companies have similar leverage expectations. Compared to Orazul Energy Peru S.A. (BB/Stable), IERL has higher expected leverage and a weaker operating environment; compared to Nautilus Inkia Holdings SCS (BB/Stable), IERL shows similar leverage levels but modest capex investments and a more flexible shareholder strategy, a combination that should derive in positive FCF through the cycle.

KEY ASSUMPTIONS

--Average capacity factors for wind assets of 44% and 24% for solar, between 2022-2024; --Capacity factors that reflect historical average hydrology conditions, in the case of Renace of 44% and 41% for Santa Teresa, between 2022-2024; --90% contracted generation through the cycle; --Average monomic price of USD115/MWh over 2022-2024; --The loan has annual amortizations USD30 million 2022 and 2027 with a balloon repayment in 2028; --Average maintenance capex at USD9 million between 2022-2024.

RATING SENSITIVITIES

Factors that could, individually or collectively, lead to positive rating action/upgrade: --A material improvement in the company's operating environment; --Sustained gross leverage below 4.0x through the rating cycle.   Factors that could, individually or collectively, lead to negative rating action/downgrade: --A material deterioration in the company's operating environment and/or applicable CC; --Total debt/EBITDA of 5.0x on a sustained basis; --Significant lag in collections that weakens the company's liquidity position; --Sustained disruptions in generation capacity due to either technical or climatological issues.

BEST/WORST CASE RATING SCENARIO

International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.

LIQUIDITY AND DEBT STRUCTURE

Strong Liquidity: As of Dec. 31, 2021, IERL reported readily available cash and cash equivalents totaling USD77.2 million, which covers its short-term debt of USD30 million. Fitch estimates that IERL will be FCF positive through the rating cycle strengthening its overall liquidity.

ISSUER PROFILE

Investment Energy Resources Limited, (IERL) is the entity through which Corporacion Multi Inversiones corporate group (the CMI Group) owns the largest and most diversified private renewable energy portfolio in Central America and the Caribbean. IERL's utility scale operating assets are in Guatemala, Honduras, Costa Rica, Nicaragua and the Dominican Republic, and have an aggregate installed capacity of over 800MW, including hydro, wind and solar generation. In addition, IERL owns commercialization and distributed generation subsidiaries in Guatemala and El Salvador and has a 50% stake in 110MW utility-scale solar joint ventures with AES Corporation in El Salvador. ESG Considerations Investment Energy Resources Limited has an ESG Relevance Score of '4' [+] for GHG Emissions & Air Quality due to the company's advantage as a renewable generation company in Central America, which has a positive impact on the credit profile, and is relevant to the ratings in conjunction with other factors. Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg.

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

Additional information is available on www.fitchratings.com

APPLICABLE MODELS

Numbers in parentheses accompanying applicable model(s) contain hyperlinks to criteria providing description of model(s).

• Corporate Monitoring & Forecasting Model (COMFORT Model), v7.9.0 (1)

ADDITIONAL DISCLOSURES

• Dodd-Frank Rating Information Disclosure Form
• Solicitation Status
• Endorsement Policy

 

ENDORSEMENT STATUS