The Argentine Peso depreciation and negative market reaction to candidate Alberto Fernandez's primary victory on Sunday raises near to medium-term refinancing risk for the country's electric utilities and increases the possibility of pesification of contract rates, says Fitch Ratings.
Generation companies depend on USD-denominated payments from Compania Administradora del Mercado Mayorista Electrico (CAMMESA) and international capital markets to access funding for capital investments and strengthen liquidity.
Pesification was a risk given fiscal constraints before the primary election result, but a Fernandez victory raises its likelihood. We believe Energia base (Resolution 1/2019), a remuneration scheme applicable to the majority of the installed capacity in the country, would be materially impacted if electricity contracts were pesified. Under Energia base, power generation remuneration scheme payments are denominated in USD and settled in Argentine pesos. Moreover, electricity prices in Argentina are already low compared to other countries in the region. Therefore further adjustments to Energia base will further adversely affect Argentine utilities' cash flow profiles. Among Fitch's rated entities, a material portion of the operations of AES Argentina, Capex, Genneia and Pampa Energia are under Energia base.
Payments in Argentine pesos rather than USD will heighten FX risk for Argentine issuers rated by Fitch because most of the company's outstanding debt is in USD. Such an amendment would force entities to strengthen their liquidity and cut back on investment plans, especially assuming refinancing options become more limited and more expensive.
The current administration under President Macri has been shifting towards an independent self-sustainable electricity market that is less reliant on the federal government, by introducing gradual adjustments to tariffs charged to end-users while simultaneously adjusting the remuneration schemes paid to generation companies.
Government subsidies to CAMMESA have materially declined, reaching approximately 35% of the total cost of the system in 2018, compared to almost 100% in previous years. Electric utilities have also experienced a more reliable payment period where CAMMESA has paid on average within 42 days in recent years, compared to a high of 115 days in March 2015. A reversal of such policies will heighten counterparty risk, potentially challenging generation companies' working capital and weakening their liquidity profiles.
Ratings of Argentine utilities (AES Argentina, Capex, Genneia and Pampa Energia) are aligned with the counterparty risk of CAMMESA/Argentina sovereign (B/Negative). AES Argentina, Capex, Genneia and Pampa Energia have strong liquidity profiles and manageable debt maturity profiles. Genneia has a USD71 million local issued notes maturing in November of 2020, which Fitch believes the company has the flexibility to repay if not refinanced. Albanesi (B-/Negative) and MSU Energy (B-/Stable) are not capped by the country ceiling but are more vulnerable than peers to potential delays in payment to CAMMESA as both companies have tight FFO to debt service coverages over the next two years.
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The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.