OREANDA-NEWS. Fitch Ratings has assigned a 'BB' rating to the AES Corporation's (AES) issuance of $500 million senior unsecured notes due in 2026. The Rating Outlook is Stable. The proceeds will primarily be used to partially refinance June 2019 floating rate notes.

KEY RATING DRIVERS

AES' rating and Outlook reflect Fitch's expectations that the company will maintain recourse debt/ adjusted parent-only cash flow (APOCF) below 5.5x and APOCF interest coverage above 2.5x over the next few years. Despite macroeconomic headwinds, AES' rating stability is expected to be driven by continued balance sheet and liquidity discipline including execution of the planned debt reduction, a balanced approach to share buybacks relative to the financial performance of investments and debt levels, reduced dependence on projects in struggling markets and successful execution of the cost cutting initiatives. The rating and Outlook also incorporate expectations that AES will maintain its current risk profile and continue to secure earnings and cash flows from regulated utility holdings and long-term contracts.

In 2015, the company reduced its recourse debt by $240 million and is expected to retire a total of $200 million debt in 2016. Parent free cash flow (FCF) is expected to grow approximately 10% from 2016 to 2018. The company has also announced a plan to potentially sell up to $1 billion assets in the next several years and a $150 million cost reduction/revenue enhancement program over three years, which could improve liquidity and accommodate debt reduction.

On April 27, 2016, AES' Maritza project in Bulgaria received approximately $350 million of receivables from Natsionalna Elektricheska Kompania EAD (NEK), which Fitch views favourably as it resolved NEK's chronic late payment issue and modestly improves cash distribution to AES. The payment was conditioned upon reducing capacity payment to Maritza by 14% through 2026 when the power purchase agreement expires. Going forward, Fitch expects the importance of distribution from Maritza to AES will continue to decline as 5.9 GW of new projects come online from 2016-2018 in the U.S., India, Chile, Dominican Republic and the Philippines.

Fitch applies a deconsolidated approach when assigning AES' ratings and Outlook due to its corporate profile and structure as an investment holding company that owns a diverse portfolio of regulated utilities and power generation assets. The primary credit measures are recourse debt/APOCF and APOCF interest coverage.

Approximately 75% of AES' consolidated debt is non-recourse. Fitch expects AES' recourse debt/APOCF to decline to below 5.5x by 2018. The APOCF interest coverage is expected to improve to 3x by 2018. These metrics don't incorporate any distribution from or equity contribution to AES' subsidiary DPL, Inc. (DPL, IDR 'B+'/Outlook Stable), whose Ohio utility is experiencing regulatory uncertainties associated with deregulation.

RATING SENSITIVITIES

Positive: Future developments that may, individually or collectively, lead to a positive rating action include:

Fitch will consider a positive rating action if recourse debt/APOCF sustains below 4.5x and APOCF interest coverage above 3.5x assuming the risk profile remains the same.

Negative: Future developments that may, individually or collectively, lead to a negative rating action include:

The ratings and Outlook could be pressured if AES fails to achieve recourse debt/APOCF lower than 5.5x and APOCF interest coverage higher than 2.5x on a sustainable basis or if AES increases shareholder distributions without a net reduction in debt. Unexpected and material financial support to DPL could also pressure AES' ratings and Outlook. A change in strategy to invest in more speculative, non-contracted assets or a material decline in cash flow from contracted power generation assets could also lead to negative actions.

KEY ASSUMPTIONS

--10% growth for POCF each year for 2017 and 2018;
--Net debt reduction of $150 million in 2016 and no debt reduction in 2017 and 2018;
--$200 million asset sale from 2016-2018 each year;
--No distribution from and no equity injection to DPL;
--2016 equity injection to its subsidiary IPALCO from AES and partner CDPQ totals $254 million (AES: $120 million, CDPQ: $134 million). No equity injections are assumed after 2016.