OREANDA-NEWS. Following Colbun S.A.'s (Colbun) announced acquisition of Fenix Power Peru (Fenix), Fitch Ratings has affirmed the foreign and local currency Issuer Default Ratings (IDRs) of Colbun at 'BBB', its long-term national scale rating at 'A+(cl)', and its national equity rating at 'Primera Clase Nivel 2(cl)'. Fitch has also affirmed the company's national scale short-term and long-term commercial paper ratings at 'N1+(cl)' and 'A+(cl)', respectively. These rating actions affect the company's international and domestic bonds outstanding.

The Rating Outlook is Stable.

KEY RATING DRIVERS
Credit Neutral Acquisition: Fitch views Colbun's recently announced acquisition of Fenix as consistent with the company's growth strategy and as neutral to its credit profile. It is also not a surprising development given the company's previously stated intent to expand internationally and that via this acquisition Colbun has diversified its geographic footprint into the stable Peruvian market.

Fitch considers Peru's regulatory framework to be supportive of the electricity sector and strong enough to entice private investment. Via the transaction, Colbun's gross leverage will moderately rise, though it will still remain under the company's maximum rating sensitivity of gross leverage of 3.5x for the 'BBB' rating level. Fitch expects the company's leverage (defined as Total Debt:EBITDA) will remain at 3.5x or below on a sustained basis. If Colbun does not maintain the aforementioned gross leverage levels, it could result in a one-notch downgrade, so the company does not have significant room at its current rating level should it make another meaningful acquisition that leads to significant incremental indebtedness.

Transaction Background: Colbun announced that it is acquiring a controlling 51% equity stake in Fenix in a transaction valued at an enterprise value of USD786 million. Colbun's cash disbursement for the transaction will total approximately USD215 million, which is well within its financial means given the company had USD1.1 billion in cash on hand as of September 2015. Regarding the transaction, the company's partners are: 1) Blue Bolt A 2015 Limited, which is a wholly owned subsidiary of the Abu Dhabi Investment Authority, and owns a 36% equity stake, and; 2)Sigma, which is a Peruvian investment management firm, and owns a 13% stake.

Fenix is a 570MW combined cycle thermoelectric power generation plant located in the Chilca district, which is approximately 64km south of Lima, and previously owned by AEI Energy. The commercial start-up from the plant was December 2014. The power plant has a favorable contractual situation as 60% of its total generation for the next eight years is currently contracted (the weighted average maturity of its contracts is 7.2 years).

Consolidated Leverage to Rise Slightly: Fitch expects Colbun to consolidate Fenix's results. In the September 2015 YTD period, the company generated approximately USD44 million in EBITDA. Annualizing this figure and adding it to Fitch's 2016 base case forecast, Colbun's consolidated leverage figure would total approximately 3.4x, which is still below the company's negative rating sensitivity of 3.5x. This does not leave much room for the company under its current rating level should it make another significant acquisition that leads to significant incremental indebtedness.

RATING SENSITIVITIES
After an extended period where Colbun's leverage and financial profile were relatively weak for the rating category, Colbun's leverage and coverage metrics have significantly improved and are now in-line with the rating category. Fitch expects that the company's gross leverage defined as Total Debt to EBITDA remains at 3.5x or below on a sustained basis. If the company does not maintain the aforementioned leverage levels, this could result in a one-notch downgrade. In addition, if there is an imbalance in Colbun's long-term contracted position and/or if the performance of its larger, more efficient thermal plants is consistently below expectations, these factors could pressure the company's credit profile.

Due to a return to elevated capex expectations over the next four years due to upcoming plant construction projects and/or potential acquisitions in both the Chilean and international markets, a positive rating action is not likely in the near future.

LIQUIDITY AND DEBT STRUCTURE
Strong Liquidity Position: As of September 2015, Colbun's total debt was USD1.9 billion and its cash position was a robust at nearly USD1.1 billion, resulting in net debt of USD800 million. The company's liquidity is enhanced by its access to committed credit lines of approximately USD170 million. Fitch expects the company to use this cash to fund its domestic/international expansion program, with expected minimum cash of approximately USD150 million during the next five years. The company should end the year at leverage levels (Gross Debt/EBITDA) of approximately 3.6x due to the timing of the transaction, with leverage remaining in the 3x-3.5x range during the next five years (under Fitch's base case investment scenario).

KEY ASSUMPTIONS
--Contracted energy sales in Chile of approximately 12,000 GW in the short to medium term rising as new capacity comes on-line;
--Company's capex program incorporates expectations for domestic projects and possible domestic/international acquisitions;
--Dividend payout rate of 30%.

Fitch affirms the following ratings:

Colbun S.A.
--Foreign and local currency IDRs at 'BBB';
--International senior unsecured bond ratings at 'BBB';
--Long-term national scale rating at 'A+(cl)';
--National senior unsecured bond ratings at 'A+(cl);
--National commercial paper long- and short-term ratings of 'A+(cl)' and 'N1+(cl)';
--National Equity Rating at 'Primera Clase Nivel 2 (cl)'.

The Rating Outlook is Stable.