(The following statement was released by the rating agency)
NEW YORK, April 15 (Fitch)
Fitch Ratings, New York, 15 April 2013: Fitch Ratings has affirmed the Issuer
Default Rating (IDR) of AES Corporation (AES) at 'BB-'. Fitch has also affirmed
the following ratings:
--Short-term IDR at 'B'
--Senior secured debt at 'BB+'
--Unsecured debt at 'BB'
--Trust preferred stock issued by AES Trust III at 'B+'
The Rating Outlook is Stable.
The affirmation reflects an improving business risk profile with the exit from
non-core markets and sale of non-core assets, sustainable reduction in corporate
overhead costs, and new growth investments in long-term contractual electricity
generation assets located in key regions.
KEY RATING DRIVERS
Deleveraging Improves Business-profile: Fitch expects AES to continue to
deleverage in absolute terms and it is a key rating driver for the assigned IDR.
The company repaid $531 million of its recourse debt in 2012 and Fitch expects
the company to further deleverage in 2013.
Exit From Non-Core Markets: In affirming the IDR, Fitch assumed that the company
will continue to divest its non-core businesses and exit non-core regions. The
company sold a number of non-core projects for an expected $1 billion in
proceeds and Fitch expects AES to continue to improve its credit and business
risk profile by exiting non-core markets and narrowing its investment focus in
terms of geographical diversity.
Reduced Cash Flow: Large capital expenditures will be required in select
portfolio investments, including Indianapolis Power & Light (IPL), and
internationally, in Chile and Asian subsidiaries. AES will likely downstream
equity as well as face reduced upstream distributions through 2015. The stress
on credit metrics during the construction period is manageable. AES' cash flows
are subordinated to substantial levels of project debt and other covenants and
restrictions typical in project level financing.
Sovereign Credit Risks: AES has a broad exposure to international markets
including sub-investment-grade countries, exposing cash flows to various risk
factors. These risks are common in emerging economies where state finances and
the property rights are weak and currency conversions and capital flows can be
restricted. A large portfolio of investments across many markets reduces this
Manageable Debt Maturities: Just $8 million of corporate level debt will mature
in 2013. AES debt maturities are $508 million in 2014 and 2015. Fitch views
these debt maturities as manageable given AES' liquidity and cash flow profile.
AES has sufficient liquidity to meet its short-term obligations at least through
2014. The company had $311 million in cash and cash equivalents at the end of
December 2012. In addition, $795 million was available under its revolving bank
credit facilities maturing in 2015. Fitch expects AES to maintain at least
between $550 million-$650 million in liquidity.
Adjusted Parent-Only Cash Flow
Fitch analyzes AES as a holding company owning a portfolio of assets and
investments in a global electricity sector given its somewhat unique corporate
profile and structure. Financially, this represents a deconsolidated approach
with respect to AES' cash flows and debt levels. Fitch uses adjusted parent
operating cash flows (APOCF), a non-GAAP measure, with its emphasis on dividends
received and return on capital, to analyze AES' credit metrics. This approach,
similar to the method used by AES' lenders in financial covenants, recognizes
that the subsidiaries are encumbered by individual debt that is structurally
superior to the debt of the corporate parent. The residual subsidiary cash flow
available for upstream dividends and distributions has greater volatility than
the direct cash flow of the operating subsidiaries, and may be subject to
payment restrictions under subsidiary debt covenants, corporate by-laws, or
Trends In Credit Metrics
In 2012, the company benefited from higher free cash flow at its U.S. and
Philippines-based merchant generation business and higher tariffs in Panama.
Financial ratios for 2012 were in line with Fitch's guidelines for the 'BB-'
Fitch has assumed that management will adjust its strategy to improve cash flow
in light of new regulatory changes in one of its largest strategic regions -
Brazil. In addition, Fitch neither assumed any dividends from DPL, Inc. (DPL,
Fitch 'BB' IDR, on Rating Watch Negative) in its forecast nor any cash support
from AES to DPL in case DPL struggles to meet its obligations over the rating
horizon. Fitch will assess AES' support of DPL once the Ohio public utility
commission approves Dayton Power & Light's electric security plan along with its
effect on the IDR.
Fitch expects APOCF to benefit from commissioning of new contracted power
capacity and from the growth in AES' contracted generation portfolio over the
rating horizon (2013-2015), although projected weakness in AES' U.S. Utilities
portfolio and on-going large capital expenditure programs at IPL and AES Gener
will reduce cash flows.
Fitch expects AES' APOCF-to-recourse debt and APOCF-to-interest to average 18%
and 2.2x, respectively, over 2013-2015, which is moderately below Fitch's
guideline metrics of 20% and APOCF-to-interest ratio of 3.0x for the 'BB-'
rating. As capital expenditures at the large indirect subsidiaries are
completed, Fitch expects AES' cash flow to improve. In addition, higher
distributions from IPL may be possible once the capital spending at IPL is
approved by the Indiana state regulatory agency and it is able to upstream
returns on construction work in progress to AES.
Cash-flow Diversity Improves Credit-Profile: AES invests in a global portfolio
of electric utilities and power generating assets. Historically, its cash flow
included distributions from over 50 projects, spread over five continents, in
any given year. Investment diversity shields the company from the macro- and
micro-economic environment adversity affecting a local domestic electricity
Cash-flow Stability Supports Outlook: Over 80% of total distributions received
by AES in any given year are from utilities and contracted electricity
generating assets, limiting exposure to volatility in electricity wholesale
markets and the merchant risk of owning un-hedged long-term assets.
The affirmation of AES' debt instruments, senior secured at 'BB+', senior
unsecured at 'BB' and trust preferred at 'B+', reflects typical notching uplift
applied to the capital structure for issuers with IDRs in the 'BB' category as
per Fitch's criteria report 'Recovery Ratings and Notching Criteria For
Utilities,' dated Aug. 12, 2012. The 'BB' category credits are accorded a
generic capital structure uplift based on Fitch's expectations of higher than
average recoveries for regulated assets over the course of a business cycle.
AES' mix of businesses, which include both regulated and non-regulated assets as
well as investments in non-developed countries, weighs on the notching uplift
The Stable Outlook reflects ample liquidity and manageable debt maturities over
the forecast period. The Outlook also reflects Fitch's view that utilities and
contracted generation continue to derive a significant portion of APOCF (greater
than 80% over the forecast period). It is Fitch's expectation that management
will pursue a balanced capital allocation policy and reduce leverage, and that
investment in new projects will be financed from return of capital from the
projects, regular distributions, and sale of non-core assets.
Positive: An upgrade of AES is considered unlikely over the 2013-2015 timeframe
given the heavy investment cycle at several of its key subsidiaries.
Negative: Future developments that may, individually or collectively, lead to
negative rating action include:
--An aggressive leveraged growth strategy;
--A sustainable material reduction in dividends received from subsidiaries.
+1 212 908-0211
Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10004
Media Relations: Brian Bertsch, New York, Tel: +1 212-908-0549, Email:
Additional information is available at 'www.fitchratings.com'.
Applicable criteria, 'Corporate Rating Methodology', dated Aug. 08, 2012, is
available at www.fitchratings.com
Applicable Criteria and Related Research
Corporate Rating Methodology
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