OREANDA-NEWS. August 04, 2015. Fitch Ratings has affirmed the foreign and local currency Issuer Default Ratings (IDRs) of Capex S.A. (Capex) at 'CCC' and 'B-', respectively. Fitch has also affirmed the 'CCC' long term rating for Capex's March 2018 senior unsecured notes totaling USD200 million.

Fitch is assigning an 'RR4' Recovery Rating to the international notes. The 'RR4' for the company's senior unsecured notes outstanding reflects an average expected recovery given default and is in line with the RR soft cap established for Argentina.

The Rating Outlook for the company's local currency IDR is Negative.

KEY RATING DRIVERS
Capex's 'CCC' foreign currency ratings are constrained by the sovereign rating of Argentina, which has an 'RD' foreign/local currency IDR. Fitch has assigned a country ceiling of 'CCC' to the Republic of Argentina, which limits the foreign currency rating of most Argentine corporates, including Capex to 'CCC'.

Country ceilings are designed to reflect the risks associated with sovereigns placing restrictions upon private sector corporates, which may prevent them from converting local currency (LC) to any foreign currency (FC) under a stress scenario, and/or may not allow the transfer of FC abroad to service FC debt obligations. Key concerns of corporates domiciled in Argentina include high inflation, government meddling, economic uncertainty, and limited access to debt markets, especially after the country's recent default.

Capex's ratings are also impacted by the high regulatory risks associated with operating in the electricity sector in Argentina, exposure to devaluation risk (currency mismatch between peso-denominated cash flows and dollar-denominated debt), and the long-term need to pursue a robust capital expenditure plan to sustain the company's vertically integrated business model. Positively, in the last two fiscal years Capex has seen slightly constructive regulatory moves by the Argentine government in the Gas/Electric sectors. Transformative reforms are needed in the Argentine electricity sector, otherwise the long-term financial viability of the sector remains uncertain.

REGULATORY RISK REMAINS HIGH: Capex's ratings reflect high regulatory risk given strong government influence in both the Electric/Utilities and Energy sectors. Capex operates in highly strategic sectors where the government both has a role as the price/tariff regulator and also controls subsidies for industry players. In the electricity sector, Capex depends on payments from government agency Compania Administradora del Mercado Mayorista Electrico S.A. (CAMMESA). Payments from CAMMESA can be volatile given this agency depends on the national government for funds to make these payments, and Argentina is currently suffering through a significant economic slowdown. In 2014, CAMMESA received approximately USD8.7 billion in funds from the Argentine treasury, which was a significant increase from the USD6.6 billion injection in 2013.

SUCCESSFUL VERTICALLY INTEGRATED MODEL: Capex is an integrated thermoelectric generation company, which was originally formed as an oil exploration and production company (it is currently the 12th largest producer of gas and liquefied petroleum gas in the country). Capex transformed itself into an electricity generation company due to its large discoveries of natural gas in 1991, coupled with the liberalization of Argentina's electricity sector.

The company's vertically integrated business model puts it in an advantageous position versus other Argentine generators. Capex benefits from operating efficiencies as an integrated thermoelectric generating company in Argentina and the flexibility from having its own natural gas reserves to supply the plant. This gives the company an advantage against other players in the industry, especially given existing gas restrictions in the country. Capex's generating units are efficient, and the proximity to its natural gas reserves in the Agua del Cajon field coupled with gas transportation restrictions from Neuquen basin to the main consumption area in Buenos Aires reduces the gas supply risk.

Capex's Proved hydrocarbon reserves total approximately 33 million Barrels of Oil Equivalent (BOE), with approximately 93% of the reserves composed of natural gas. Based on daily production in 2015 of 54,000 BOE, the company's overall reserve life is solid at approximately nine years.

POSITIVE REGULATORY MOVES: Capex has benefited from recent positive regulatory rulings in both the Oil & Gas and Electricity sectors. In the Oil & Gas sector, in 2013 the government passed resolution 60/2013 whereby it created a stimulus program that would provide firms on a quarterly basis, compensation for incremental natural gas production. In order to participate, industry firms, including Capex, committed to increase natural gas production. The program set a compensation scheme for gas producers with average production of 3.5 million cubic meters per day (MMm3/d) which ranged between USD4/MMBTU to USD7.5MMBTU for incremental gas production. This program is slated to last four years, and the benefits can already be seen as Capex has increased the price it has been able to sell its natural gas to USD4.95/MMBTU in the April 2015 fiscal year versus USD4.09/MMBTU in the April 2013 fiscal year.

In the electricity sector, over the last two years the government put forth a more favorable remuneration scheme which has helped the company improve its financial performance. Furthermore, the remuneration scheme was revised in May 2014 to add remuneration of nonrecurring Operations and Maintenance (O&M) expenses and adjusted upwards the remuneration of fixed expenses. Net-net, this new remuneration scheme should allow Capex to at least break-even or generate slightly positive EBITDA in the electricity segment during 2015.

FINANCIAL IMPROVEMENT: In large part, due to the government's slightly improved regulations, the company has seen improving financial metrics. On a dollar basis, for the fiscal year ended April 2015 period, Capex registered EBITDA of USD66 million, which was slightly down from USD70 million in 2014 but 10% higher than 2013 results. EBITDA margins tightened to 44% versus the previous year's 54%, but remain higher than 2013's level of 40%. Free cash flow was positive at USD34 million, which was slightly better than the USD31 million generated in 2014. Fitch expects the improvement of the company's financial/operational performance to continue in the April 2016 fiscal year, with the company generating slightly higher EBITDA for the year as increased gas prices more than offset lower LPG/Butane prices.

RATING SENSITIVITIES

Capex's ratings could be negatively affected by a combination of the following: further economic deterioration and the Republic of Argentina's inability to convert and transfer foreign exchange for Capex; given high dependence on the subsidies by CAMMESA from the Treasury, any further weakening of Argentina's fiscal accounts could have a negative impact on the company's collections/cash flow; a significant deterioration of credit metrics; and/or sustained declines in gas reserves/production or failure to further develop new fields, which could threaten the integrated business model in the long-term would be another potential negative factor.

A positive rating action in the short to medium term is considered unlikely given Argentina's current sovereign restricted default rating.

LIQUIDITY AND DEBT STRUCTURE

Solid Liquidity and Improved Leverage: The company's total debt of USD249 million was slightly higher than the USD235 million reported in the April 2014 fiscal year. Capex's long-term debt is primarily composed of a 10% USD200 million long-term bond with a March 2018 maturity date. As of April 2015, the company reported cash and equivalents totaling USD44 million versus short-term debt of USD26 million, giving the company one of the strongest liquidity profiles for Argentine corporates rated by Fitch.

The company's leverage levels have steadily improved due to the company's improved financial performance, as leverage defined as Total Debt:EBITDA was 3.8x in 2015 versus 3.4x in 2014 and 4.2x in 2013. Fitch expects for leverage to remain in the 3.5x-4x level in the short-to-medium term, though long-term forecasts for Argentina can be volatile and highly dependent on macroeconomic conditions in the country.

KEY ASSUMPTIONS
--Consistent double-digit currency depreciation per year;
--Energy production to range between 3,800GWh/year and 4,200GWh/year;
--Natural gas sales prices climbing slightly from current USD5/MMBTU per year over next five years;
--Overall, EBITDA to average approximately USD70 million/year;
--Leverage in the 3.5x-4.0x level during next five years.

Fitch has taken the following rating actions:

Capex S.A.
--Foreign currency IDR affirmed at 'CCC';
--Local currency IDR affirmed at 'B-';
--International senior unsecured bond ratings affirmed at 'CCC'; Recovery Rating of 'RR4' assigned.

The Rating Outlook for the local currency IDR is Negative.