Research: Rating Action: Moody’s Confirms Interchile’s Baa1 Rating

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New York, July 08, 2022 — Moody’s Investors Service (“Moody’s”) today affirmed Interchile SA’s Baa1 senior secured debt rating. The Rating Outlook is Stable.

Outlook Actions:

..Issuer: Interchile SA

….Outlook remains stable

Statement:

..Issuer: Interchile SA

….Senior Regular Secured Bond/Debenture, Confirmed Baa1

RATINGS RATIONALE

The Baa1 rating takes into account the strong characteristics and essentiality of the project assets which consist of key transmission lines (1,500 km) in Chile that connect electricity production in the north of the country to consumption areas in Santiago. . The project also includes an additional line connecting Lagunas and Encuentro, 9 substations and more than 2,100 pylons and it is fully operational.

The credit profile also takes into account the strong predictability of cash flows during the fixed tariff period of the project (first 20 years from COD) with fixed annual revenues (VAT), adjusted for inflation, which are not subject to volume risk. The rating takes into account that after the first 20 years, project revenues will reset to a regulated tariff or return to investment value (VI). Although this adds some uncertainty to the project’s long-term revenues, we are reassured that the VI will be calculated by the regulator taking into account the cost of constructing a similar asset at that time without risk of change in technology as the calculation is based on the replacement value of the assets as if they were new but with the same physical and technical characteristics as the original, which mitigates the potential disadvantage of the VI. Additionally, the financing has been structured to provide an additional cushion in terms of the debt service coverage ratio (DSCR) of the project after the reset as the DSCR increases at that time to over 1.50x against an average of 1.25x during the fixed tariff period, which means that the IV (and therefore the revenues of the project) can be lowered -on average- by 33% compared to the base case to arrive at an equilibrium scenario .

The Baa1 rating also takes into account Chile’s solid institutional framework despite the growing challenges and social demands in the country. Transmission regulations have been in place for over 15 years, with some recent changes which have not resulted in significant negative changes for companies operating in the transmission industry and which have been widely anticipated, widely discussed and phased in implemented.

The expertise and track record of project sponsor Interconexion Electrica SAESP (ISA, Baa2 stable) in operating transmission assets in other Latin American countries is also an important factor for recommendation, especially given that the project will be self-operated. ISA is a strategic investor for the project which is also expanding its investments in other transmission assets in the region.

The Baa1 rating recognizes high initial leverage, with a target average DSCR at 1.25x during the fixed rate period, which increases to an average of 1.35x during the reset period and a lagging debt structure. The financing contemplates a 7-year interest-only period, with principal repayments beginning only in the eighth year and increasing thereafter, but more steeply after the end of the 20-year fixed rate period. However, there is no refinancing risk for the Notes as the debt will be fully amortized at the end of the 35 year financing period.

The transaction also includes typical project finance features, including a 6-month debt service reserve account, a 1-month O&M reserve account; restrictions on business activities, a security package that benefits senior creditors with priority pledges on physical assets, accounts and insurance, a distribution test subject to a DSCR of 1.15x (backward and forward looking) and limitations on additional indebtedness.

ESG CONSIDERATIONS

Interchile’s exposure to ESG attributes is broadly considered to have limited impact on the current rating, with greater potential for negative impact over time.

Interchile’s exposure to physical climate risks is moderate and common for transmission companies whose networks are not underground and therefore more exposed to climatic events that could damage assets. The company’s carbon transition exposure is slightly neutral given that it is a pure transport company that has no production assets.

The company’s social risk is also moderate, reflecting moderate risks of unfavorable regulations due to social pressures or public concerns about the problems of affordability of regulated tariffs that have recently arisen in Chile and which have led, for example , the recent temporary suspension of the indexation of electricity tariffs.

Finally, governance risk for Interchile is low/neutral as the company’s financial profile reflects strong structural safeguards built into the company’s project-funded structure that limits the emergence of additional debt and distributions.

Rating outlook

The outlook is stable, reflecting our expectation of sound operations and visible, stable cash flow from long-term fixed annual revenues that will deliver a DSCR of 1.25x over the transaction’s fixed rate period to 2037.

FACTORS THAT MAY LEAD TO AN IMPROVEMENT OR DEGRADATION OF THE RATING

Given the stable outlook and expected stable earnings, combined with high initial debt levels and the overdue debt amortization profile, an upgrade in ratings is unlikely in the near term.

Downward pressure on ratings could arise if the operational performance of the assets or their ability to generate cash, either due to higher than expected expenditures or due to an unexpected adverse change in the regulatory framework for transport companies , are lower than expected, so the DSCR is still below 1.20x.

The main methodology used in this rating is that of Regulated Electricity and Gas Networks published in April 2022 and available on https://ratings.moodys.com/api/rmc-documents/386754. Otherwise, please see the Scoring Methodologies page on https://ratings.moodys.com for a copy of this methodology.

Profile

Interchile SA is a Chilean transmission company that owns and operates a portfolio of transmission assets, comprising over 1,500 kilometers of transmission lines. The company started operations in 2019 and its transmission assets are key to Chile’s decarbonization goal, facilitating the transport of renewable energy produced in the north of the country to the largest cities and centers of consumption. Interchile is 100% owned directly and indirectly by ISA.

REGULATORY INFORMATION

For details on key rating assumptions and Moody’s sensitivity analysis, see the Methodological Assumptions and Sensitivity to Assumptions sections in the Disclosure Form. Moody’s rating symbols and definitions can be found at https://ratings.moodys.com/rating-definitions.

For ratings issued on a program, series, category/class of debt or security, this announcement provides certain regulatory information regarding each rating of a subsequently issued bond or note of the same series, category/class of debt, security or under a program for which ratings are derived exclusively from existing ratings in accordance with Moody’s rating practices. For ratings issued on a media provider, this announcement provides certain regulatory information relating to the credit rating action on the media provider and each particular credit rating action for securities whose credit ratings are derived from the support provider’s credit rating. For the provisional ratings, this press release provides certain regulatory information relating to the provisional rating assigned, and to a final rating that may be assigned after the final issuance of the debt, in each case where the structure and conditions of the transaction n have not changed prior to the final rating being assigned in a way that would have affected the rating. For more information, please see the issuer/transaction page of the respective issuer at https://ratings.moodys.com.

For all relevant securities or rated entities receiving direct credit support from the lead entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action , the associated regulatory information will be that of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to the jurisdiction: Ancillary services, Disclosures to the rated entity, Disclosures to be provided by the rated entity.

The rating has been communicated to the rated entity or its designated agent(s) and issued without modification as a result of such communication.

This rating is requested. Please refer to Moody’s Policy for the Designation and Assignment of Unsolicited Credit Ratings available on its website. https://ratings.moodys.com.

The regulatory information contained in this press release applies to the credit rating and, if applicable, the outlook or rating revision relating thereto.

Moody’s general principles for assessing environmental, social and governance (ESG) risks in our credit analysis are available at https://ratings.moodys.com/documents/PBC_1288235.

The worldwide credit rating on this credit rating announcement was issued by one of Moody’s affiliates outside the EU and is approved by Moody’s Deutschland GmbH, An der Welle 5, Frankfurt am Main. -le-Main 60322, Germany, in accordance with Article 4(3) of Regulation (EC) No 1060/2009 on credit rating agencies. Further information on the EU approval status and the Moody’s office that issued the credit rating can be found at https://ratings.moodys.com.

The worldwide credit rating on this credit rating announcement has been issued by one of Moody’s affiliates outside the UK and is approved by Moody’s Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the United Kingdom. . Further information on the UK endorsement status and the Moody’s office that issued the credit rating can be found at https://ratings.moodys.com.

Please see https://ratings.moodys.com for any updates on changes to the lead rating analyst and Moody’s legal entity that issued the rating.

Please see the issuer/transaction page at https://ratings.moodys.com for additional regulatory information for each credit rating.

Daniela Cuan
Vice President – Senior Analyst
Infrastructure Finance Group
JOURNALISTS: 1 800 666 3506
Customer service: 1 212 553 1653

Christiane Specel
Senior Vice President/Manager
Infrastructure Finance Group
JOURNALISTS: 0 800 891 2518
Customer service: 1 212 553 1653

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