Fitch Affirms Isagen’s Issuer Default Ratings at BBB- with Positive Outlook

Fitch Ratings has affirmed the long-term foreign issuer default ratings (IDR) and long-term local currency IDRs of Isagen S.A. ESP at BBB-. The New York-based rating agency also assigned a positive rating outlook for the IDRs.

In addition, Fitch has affirmed Isagen’s long-term national scale rating and its local bond
issuances at AAA (col), with a stable outlook, while affirming its short-term national scale rating at F1+ (col).

The agency said that its ratings and outlook for the Medellín-based power-generation company are based upon “expectations that the company’s credits metrics will continue to strengthen given robust cash from operations and the reduction of capital expenditure needs going forward.”

It added that “Isagen’s ratings reflect its solid business position, prospects for moderate financial leverage and adequate liquidity, and manageable exposure to regulatory risk.” With just 7.5% of the company’s financial debt being U.S. dollar-denominated, its foreign exchange risk remains low as well.

Fitch also noted that Isagen’s operational performance should be enhanced by its low marginal costs and “adequate portfolio of generation assets.”

This marks a recovery from a year ago when the company was dealing with operating pressures following a severe stretch of the El Niño weather phenomenon that hit Colombia and caused an extended drought. While Isagen, the third largest power generation company in the country, has 3,032 megawatts of installed capacity, some 90% are this comes from hydroelectric assets.

“During this situation Isagen’s electric generation fell by 11% to 11,392 gigawatt hours,” stated Fitch. “In order to fulfill contracted sales, the company increased spot market energy purchases by 48% at the high prices caused by the El Niño phenomenon.”

On top of the turnaround since last year, Fitch highlighted Isagen’s improving leverage position and “adequate” liquidity levels that are “supported by a healthy cash balance” and a “manageable debt structure profile.”

The rating agency expects Isagen’s leverage to fall further this year as earnings improve and the benefits of refinanced maturities continue to play out. If the company meets Fitch’s expectation of 1.2 trillion pesos in earnings in 2017 (EBITDA), it sees leverage “trending to 2.5x during 2017-2019.”

Some uncertainly does remain, however. Late last month, Moody’s Investors Service withdrew its issuer rating for Isagen, which was formerly controlled by Colombia before being sold to Canada-based Brookfield Renewable Energy for around $2 billion USD early last year. Moody’s said its decision was based on having “insufficient or otherwise inadequate information to support the maintenance of the rating.”

In its statement, Fitch Ratings noted the company’s structural unknowns as a factor that it was not able to include in its ratings rationale. “Isagen’s ratings do not factor in the potential absorption of its shareholder in Colombia, BRE Colombia Holdings S.A.S., the vehicle that Brookfield used to acquire its stake in Isagen,” stated Fitch.

“On April 28, 2017, Isagen announced a special shareholder meeting to take place on June 1, 2017, to consider and potentially approve the merger,” the agency continued. “Fitch believes there is limited information at this point to assess the ultimate impact of this transaction on Isagen’s credit profile. Fitch will monitor the development of this transaction and any implication on Isagen’s capital structure.”

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