Fitch Expects to Rate Transelec's Proposed Sr. Unsecured Bond Issuance 'BBB'; Outlook Stable

Fitch Ratings expects to assign a rating of 'BBB(EXP)' to Transelec S.A.'s (Transelec) proposed senior unsecured debt issuance of up to USD350 million. The proceeds will be used for the refinancing of senior financial debt and general corporate purposes. A portion of the proceeds will be used to repay short-term debt including approximately USD231 million of UF-denominated Series C bonds and USD25 million of short-term bank loans.

The notes will rank at least pari passu in priority of payment with all other Transelec's senior unsecured debt. The notes would be rated the same as all of Transelec's senior unsecured obligations.

KEY RATING DRIVERS

Transelec's ratings are largely driven by the company's low business risk profile reflected in highly predictable and stable cash flow generation, combined with a solid balance sheet and a broad financial flexibility. The ratings also reflect the company's relatively lower sector risk versus other regional transmission companies, as Transelec owns its transmission assets rather than operating them under concession agreements as typically seen in the region.

Furthermore, though privately owned, the company's ratings also incorporate the strategic importance of Transelec to the Republic of Chile (IDR 'A+'). Transelec is the owner of approximately 80% of the country's main energy transmission system, and its operational and financial strength reflect the country's robust regulatory framework, which has remained stable over time. Although Chile's congress is currently discussing a new energy transmission law which is expected to be approved during the next couple of weeks, Fitch does not expect this new regulation to materially harm the businesses' strengths, stability and/or profitability. Fitch will watch for unexpected changes in local regulation once details are available.

The company's liquidity profile remains solid, with no significant debt maturities until 2023, with the exception of approximately CLP155 billion (approximately USD231 million) local series C bond due in September 2016, which will be refinanced with the proceeds of the proposed issuance.

The main ratings constraints are related to the company's relatively high leverage level as compared to peers in the rating category. Transelec has limited headroom for any meaningful increase in debt, as the company is targeting maintaining long-term maximum debt-to-EBITDA ratios in the 6.0x - 6.5x range. Offsetting this, the company has highly stable cash flow generation, a comfortable maturity schedule, and implicit shareholder support from the company's shareowners: Brookfield Asset Management Inc., CPP Investment Board, British Columbia Investment Management Corporation, and PSP Investment.

Low Business-Risk Profile: Transelec's ratings reflect its low business-risk profile stemming from its exceptionally stable and predictable cash flow generation, characteristic of electric transmission utility companies, and its natural monopoly condition. The regulatory environment in Chile is considered solid and stable, and provides for certainty in the determination of regulated transmission revenues and returns on future investments. Tariff resets for 2015 were rescheduled to 2016 due to large delays in the studies. Going forward and based on the historical results of previous tariff-setting processes, Fitch does not expect the tariff resets to have a material impact on the company's revenues.

Stable Operating Performance Strengthens Credit Metrics: Transelec's financial results for 2015 have come in slightly above Fitch's expectations, especially measured in USD due to the effect of the Chilean Peso (CLP) depreciation versus the USD, as Transelec's tariffs are partially indexed to the USD while most of its costs are CLP linked. As of the 12-month period (LTM) ended March. 31, 2016, Transelec recorded EBITDA generation of CLP227.6 billion (USD338.7 million), for a 7.7% increase versus year-end 2014 and an EBITDA margin of 82.6%. Going forward Fitch expects EBITDA margins closer to 80%, as tariff resets are usually pressured downwards and such decreases are compensated with new assets entering operations. The next tariff reset is expected for 2020.

Increased EBITDA generation linked to a stronger USD, combined with a mostly local currency-denominated debt resulted in stronger credit metrics for the LTM as of March 2016. Leverage measured as financial debt-to-EBITDA reached 5.9x measured in CLPs and 5.8x in USDs, and stands at the strong end of the company's target. Incorporating the proposed bond issuance of up to USD350 million, the company's total debt-to-EBITDA for the past 12 months would rise to 6.3x on a pro forma basis.

Fitch does not expect significant deleveraging going forward as the company's financial strategy is aimed at maintaining a leverage level measured as debt-to-EBITDA in-between 6.0x and 6.5x in the long term. Net leverage for the LTM ended March 2016, was 5.7x, while interest coverage remains stable at 3.8x. Overall, Transelec continues to show a stable financial position based on its strong operating cash flow generation.

High Capex and Dividend Payouts Ensure High Leverage to Continue: Transelec's leverage is considered high for its rating category. Leverage is largely driven by the company's capex program of close to USD200 million per year, and a dividend policy of distributing 100% of net profits, which has resulted in negative FCF on a sustained basis. Additionally, during 2015 the company paid out extra funds to shareholders in the form of a 10-year-term inter-company loan for approximately USD70 million.

Transelec's capex level remains at USD200 million per year, and is mostly focused on reinforcing its leading position in Chile through the development of new transmission projects. During 2015 the company started exploring investment opportunities in Peru, which could include the acquisition of existing assets and/or the development of new ones. The company has stated that these possibilities are to be analyzed under the same criteria of risks and returns that it applies to its operations in Chile.

KEY ASSUMPTIONS

--Tariff reset in line with expectations (-1% to -3% on average);

--New transmission law does not have a material impact in the industries' fundamentals;

--EBITDA generation of CLP220 billion - CLP250 billion for the 2016 - 2018 period;

--Dividend pay-out rate of 100% of net income;

--Annual capex in the range of CLP100 billion - CLP150 billion;

--FCF remains mostly negative.

RATING SENSITIVITIES

Future developments that may, individually or collectively, lead to a negative rating action include: a significant negative change to Chile's regulatory framework; a change in company's strategy to become more aggressive in terms of leverage, dividends, and capital expenditures; sustained leverage ratios above 6.5x total debt-to-EBITDA levels; or movement beyond expected debt levels, liquidity, and operational earnings.

Although unlikely in the near term given the company's capital structure profile, a positive rating action could be considered if the company decreases its financial leverage. In particular, leverage levels of 4.5x or below would be seen as positive.

LIQUIDITY

Liquidity is supported by access to refinancing and a comfortable debt maturity schedule. As of March 2016, the company had cash on hand in the amount of CLP25.18 billion (USD37.23million) and short-term debt maturities of CLP184 billion (USD272.4 million). The majority of this short-term debt corresponds to local bonds (series C) maturing in 2016 that will be repaid with the proceeds of the proposed issuance. Thereafter, the company faces no debt maturities until 2023.

Transelec's liquidity is additionally supported by its proven access to both domestic and international capital and financial markets, as it is the largest individual local bond issuer in Chile. Finally, the company's liquidity is complemented by a USD250 million committed revolver credit line maturing in September 2017.

FULL LIST OF RATING ACTIONS

Fitch currently rates Transelec as follows:

--Foreign Currency Long-Term IDR at 'BBB';

--Local Currency Long-Term IDR at 'BBB';

--Long-Term National scale rating at 'AA-(cl)';

The Rating Outlook is Stable.

--Senior unsecured international bonds at 'BBB';

--Local bond program No.480 and Series C at 'AA-(cl)';

--Local bond program No.481 and Series D at 'AA-(cl)';

--Local bond program No.598, at 'AA-(cl)';

--Local bond program No.599 and Series H, K, M and N at 'AA-(cl)';

--Local bond program No.743 and Series R and U at 'AA-(cl)';

--Local bond program No.744 and Series Q, S and T at 'AA-(cl)'.

Date of Relevant Rating Committee: Jan. 28, 2016

Additional information is available on www.fitchratings.com.

Applicable Criteria

Metodologia de Ratings Corporativos - Incluindo Ratings de Curto Prazo e Vￃﾭnculo Entre Matrizes e Subsidiￃﾡrias (pub. 06 Nov 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=873441

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