Fitch Ratings has upgraded Mercury Chile HoldCo LLC's (Mercury Chile) Long-Term Foreign Currency Issuer Default Rating (IDR) to 'BBB-' from 'BB+'.
The Rating Outlook is Stable. In addition, Fitch has affirmed the company's senior secured USD360 million notes, guaranteed by Inversiones Cachagua SpA, Mercury Chile Co II Ltd., Inversiones LK SpA and Omega SpA at 'BB+'.
Mercury Chile's upgrade reflects the consolidated view of its rating in relation to its subsidiary, under Fitch's 'Parent Subsidiary Linkage Criteria,' AES Andes S.A.'s (BBB-/Stable) following the near 100% ownership of the company and the capital structure of the combined entities.
The notes have a first lien security interest on the shares purchased pursuant to the tender offer of minority shareholders of AES Andes, as well as negative pledge over the AES Andes shares already owned by the offeror, Inversiones Cachagua SpA, prior to the tender offer.
Key Rating Drivers
Consolidated Credit Profile: Fitch views AES Andes and Mercury Chile as a consolidated entity, per its 'Parent and Subsidiary Linkage Criteria,' but Mercury's secured notes are one notch below AES Andes due to its structural subordination. Fitch estimates AES Andes's gross leverage will remain between 3.5x and 4.0x over the rating horizon, peaking at 4.0x by the end of 2023, which assumes USD360 million senior secured notes issued by Mercury Chile, guaranteed by the guarantors.
Mercury's leverage profile at 1.5x in 2022, assumes a 100% equity ownership by Inversiones Cachagua and dividends received/interest expenses are estimated at 11.0x, also assuming a 100% equity ownership of AES Andes.
Stable Distribution Stream: Mercury Chile's ratings benefit from a healthy stream of distributions paid by AES Andes to its ultimate parent AES Corp (BBB-/Stable). Fitch recognizes that all cash distributions paid by AES Andes must flow through Inversiones Cachagua and Mercury Chile. AES Andes is a material cash flow contributor to AES Corp, and represent approximately 20% of total cash distribution received at the AES Corporation level in 2022. Fitch's rating case assumes cash distributions from AES Andes will range between USD250 million and USD300 million annually from 2023-2026.
With the deconsolidation of Alto Maipo and the USD200 million impairment from disconnecting Norgener coal units by 2025, AES Andes's contribution to its parent will come from capital reductions between USD250 million and USD300 million through 2023-2026.
Structural Subordination: AES Andes' hybrid and senior secured notes issued by Mercury Chile have equal probability of recovery, considering AES Andes's USD844 million outstanding hybrid debt as junior subordinated. The rating case assumes that under AES Andes's existing hybrid bonds covenants, the right to pay up to 30% of its net income for dividends follows Chilean securities law and bylaws, which will comfortably cover debt service at the Mercury Chile level.
Leverage Within Expectations: AES Andes' gross leverage will remain between 3.5x and 4.0x over the rating horizon, peaking at 4.0x by the end of 2023 and EBITDA-to-interest paid will remain above 3.5x. For the LTM ended March 31, 2021, AES Andes EBITDA leverage reached 3.7x., in line with the 3.4x registered during YE 2022. Fitch's base case assigns USD258 million equity credit to AES Andes's outstanding USD844 million hybrid notes. Per Fitch's 'Corporate Hybrids Treatment and Notching Criteria,' there is no explicit limit on equity credit granted, but equity credit is not fully given when hybrids comprise of more than 25% of a company's capital structure.
Low Business Risk: AES Andes' ratings reflect its low business risk resulting from a balanced contractual position with most of these contracts including fixed charges and passthrough clauses of variable costs with strong counterparties and an average remaining life of eleven years in Chile and ten years in Colombia, combined with a diverse portfolio of generation assets that support cash flow generation stability and predictability. The ratings also reflect the company's major plants operating under constructive regulatory environments in Chile and Colombia.
Derivation Summary
Mercury Chile's ratings compare well to other utility holding companies (HoldCo) in the region such as A.I. Candelaria (Spain; S.A. (BB/Stable) and Electricidad Firme de Mexico Holdings, S.A. de C.V. (EFM) (BB/Stable). These HoldCo's depend on the cash distribution of their main subsidiaries, OCENSA (BB+/Stable) and Cometa Energia (BBB-/Stable), respectively to service financial obligations.
Mercury Chile is rated one notch below AES Andes and one notch above A.I. Candelaria and EFM, given moderate leverage profile compared to peers and higher structural subordination to both A.I. and EFM. Fitch expects Candelaria total debt-to-EBITDA to reach 4.2x in 2022, while EFM should reach 4.9x in 2024, and Mercury Chile should be around 1.0x-1.5x over the rating horizon.
Key Assumptions
Fitch's Key Assumptions Within the Rating Case for the Issuer:
Cash distributions from AES Andes between USD300 and USD250 million throughout 2023-2026;
Contracted volume in Chile of 11,300GWh, 10,400GWh and 9,700 during 2023-2026;
Average energy sales in Colombia of 6,500GWh during 2023-2026;
Thermal coal (Australia Newcastle) at USD190 per ton during 2023, USD90 per ton in 2024, USD83 per ton during 2025 and USD63 in 2026;
Decarbonization Strategy: Disconnect Ventanas 3 and 4, Angamos and Norgener 1 and 2 during December 2025;
Total capex of USD1.3 billion in 2023-2025, including maintenance;
Additional renewable installed capacity, including wind, solar and batteries of 3985MW in 2023, 464MW in 2024 and 524MW during 2025;
AES Andes monetizes approximately USD200 million from PEC2 during 2Q23;
Equity credit assigned to hybrids notes totaling USD258 million;
Expansion projects to be financed with cash flow, new contracts and partnerships.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Under the current structure an upgrade of Mercury Chile is unlikely given the capital structure of the consolidated entity; however, an upgrade of AES Andes IDR will likely result in an upgrade of Mercury Chile if the parent subsidiary linkage relationship remains intact.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
A downgrade of AES Andes ratings;
Leverage measured as Holdco (Mercury Chile HoldCo and/or Inversiones Cachagua SpA) debt/cash distribution above 3.0x over the rating horizon while consolidated leverage measured as total debt/EBITDA is above 3.5x on a sustained basis.
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
Liquidity linked to AES Andes: Mercury Chile holds approximately USD21million in cash as of December 2022. As a utility holding company, Mercury Chile's liquidity mirrors the cash streamed by AES Andes. Mercury Chile's outstanding debt as of March 2023 is comprised of USD318 million notes due 2026.
Fitch deems AES Andes liquidity as adequate, as of March 2023, the company had cash on hand of USD189 million, and short-term debt maturities of USD375 million, mainly concentrated in bank debt. AES Andes's liquidity is supported by good access to refinancing and a comfortable debt maturity schedule. Liquidity is further buoyed by a USD200 million undrawn committed revolving credit facility.
Issuer Profile
Mercury Chile is a holding company registered in Delaware, that owns 100% of the shares of Inversiones Cachagua Spa in Chile, an entity that holds more than 99% of the shares of AES Andes. Mercury Chile is 100% owned by The AES Corporation.
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.
ESG Considerations
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
AES ANDES S.A. 
