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April 7, 2008 |
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ISA CAPITAL: Fitch Holds Currency Issuer Default Ratings at BB Fitch Ratings has affirmed ISA Capital do Brasil S.A.'s foreign and local currency Issuer Default Ratings at 'BB'. The rating action applies to US$554 million in senior secured notes outstanding. The rating outlook is stable. ISA Capital do Brasil's ratings are based on the strong credit quality of Companhia de Transmissao de Energia Eletrica Paulista, its sole revenue source and only operating asset. Companhia de Transmissao's strong credit quality is attributable to the company's monopoly position, its stable and predictable operating cash flow and its financially sound credit profile. The ratings also reflect the noteholders' structural subordination to Companhia de Transmissao's obligations, as well as the company's concession renewal and refinancing risks. Although, Companhia de Transmissao's credit quality is strong, ISA Capital's credit quality is somewhat weaker given that the company only owns 37.5% of Companhia de Transmissao's total capital and does not receive the full benefits of operating cash flow. ISA Capital's debt service coverage ratios approximately 2.8 as of year end 2007. The company received dividends of approximately BRL284 million and had interest expenses of BRL105 million during 2007. Going forward, ISA Capital is expected to increase its cash reserves by approximately BRL100 million per year during the next four years in order to cover the amortization of the 2012 notes. Companhia de Transmissao's monopoly position stems from its exclusive right to provide electricity transmission services through its three concessions expiring in 2015, 2031 and 2038, respectively. Furthermore, two Companhia de Transmissao concession are located in the state of Sao Paulo, which accounts for one-third of Brazil's overall GDP, making it one of the largest electricity consumers in the country, and the third one, which will still be constructed, is in the Northeast of Brazil. The company's strong market position should further benefit the company when it participates in future bids for new transmission lines in Brazil. Companhia de Transmissao generates a stable and predictable cash flow, exhibiting the low business risk profile of an electric transmission utility company. Its tariff-setting mechanism is straightforward, receiving minor intervention from its regulator. The company's tariffs are fixed and 86.4% of its permitted annual revenue will not be revised by the regulator until 2015, being adjusted by inflation every July. The other 13.6% are revised by the regulator every four years and automatically adjusted by inflation every year. Its revenue is stable and exempt from volumetric risk. The permitted annual revenue, which represented approximately 99% of the company's total revenue in 2007, is based on the electricity transmission assets available to users, instead of the transmitted electricity volume. Companhia de Transmissao's credit metrics are supportive of its holding company's credit ratings. The operating asset credit metrics are characterized by low leverage and strong interest coverage. Since ISA's acquisition, Companhia de Transmissao's EBITDA margin has improved, as expected, to approximately 86% in 2007 fiscal year from the pre-acquisition 54% in the first half of 2006. Its current EBITDA margin is more in line with its peers. Healthy operating cash flow has allowed the company to finance its growth with internally generated cash and thus maintain low leverage levels. ISA Capital's ratings also reflect the strong covenant package that, among other things, limits Companhia de Transmissao's future level of indebtedness. The company's expected leverage and interest coverage should be well within the limits imposed by the covenants, which require leverage of no more than 3.0 and interest coverage of at least 3.0. In addition, under the covenant package, ISA Capital is not allowed to declare or pay any dividends or make any distributions. Headquartered in Sao Paulo, Brazil, ISA Capital do Brasil -- http://www.isacapital.com.br/ -- is a holding company created to participate in the privatization of Companhia de Transmissao de Energia Electrica Paulista (CTEEP). The company was incorporated with a US$378 million equity contribution by Interconexion Electrica S.A. E.S.P. and a US$609 million intercompany loan from Interconexion Electrica. CTEEP, ISA Capital's sole source of revenue and only operating asset, is a privately owned electricity transmission company located in the state of Sao Paulo. The company holds three concessions for the transmission of electricity in the state of Sao Paulo, the first one expiring in 2015 and the second one in 2031. The third concession contract, expiring in 2038, was signed on March 17,2008, which comprises the construction, operating and maintenance of two transmission lines in the Northeast of Brazil, that CTEEP won at November 2007's auction. |
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