Fitch: EPM's Recent Acquisition Announcements Neutral to Credit Quality

CHICAGO--(BUSINESS WIRE)-- Fitch Ratings expects Empresas Publicas de Medellin E.S.P.'s (EPM) recently announced acquisition initiatives to be credit neutral as leverage should remain at or below 3.5x at its peak and decline to near or below 3.0x in the medium term. The company could see, nevertheless, a deterioration in its credit quality and potential negative actions on its international foreign and local currency ratings should it decide to pursue additional acquisitions in the medium term that result in total debt-to-EBITDA to exceed 3.5x. Fitch currently rates EPM's foreign and local currency Issuer Default Ratings 'BBB+'. A negative action on the company's national scale rating of 'AAA(col)' is not expected in the medium term, even if the international ratings see a one-notch downgrade.

Fitch's ratings for EPM incorporate the company's aggressive growth strategy, yet assume it will maintain a conservative capital structure commensurate with its rating level in the long term. EPM's growth strategy is considered aggressive and is aimed at increasing consolidated revenues and EBITDA by investing in related businesses both within Colombia and abroad. The company's goals are to reach revenue and EBITDA levels of USD16 billion and USD5.5 billion, respectively, by 2022. This implies doubling the company's size over the next decade. EPM will likely see challenges reaching its goals while maintaining its capital structure in line with the assigned rating. Fitch expects the company to continue executing caution in its expansion strategy so as not to deteriorate its credit quality.

As a result of the company's growth strategy, free cash flow (FCF) is expected to be negative as the company carries on its capital investment program of more than USD8 billion. Fitch previously expected EPM's debt to increase moderately as the company financed a portion of its investments with debt while maintaining consolidated leverage ratios below 3.5x. Over the short term, the company's interest coverage ratios might range between 5.0x to 8.0x. These credit metrics would still be considered consistent with the company's assigned ratings as long as the deterioration in credit metrics it is temporary.

On April 17, 2015, EPM announced it was in negotiation to acquire a 22% equity interest in Brazil's transmission company Taesa for approximately USD500 million. On April 23, 2015, EPM announced it had reached an agreement to acquire 100% of Chilean water utility Aguas de Antofagasta S.A. (ADASA) for approximately USD960 million. EPM expects to finance approximately 70% of Taesa's acquisition and 40% of ADASA's acquisition with debt at either the target companies or at intermediate holding vehicles. Concurrently, EPM is building Hidroituango, a 2,400 MW of installed capacity hydroelectric plant in Colombia with an estimated capex of USD5.5 billion which is expected to come online at the end of 2018.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Corporate Rating Methodology', May 28, 2014;

--'National Scale Ratings Criteria', Oct. 30, 2013.

Applicable Criteria and Related Research:

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkagehttp://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393

National Scale Ratings Criteriahttp://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=720082

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Fitch Ratings
Primary Analyst
Lucas Aristizabal, +1-312-368-3260
Senior Director
Fitch Ratings, Inc.
70 W Madison Street
Chicago, IL 60602
or
Secondary Analyst
Julio Ugueto, +1(571) 326 9999
Associate Director
or
Media Relations, New York
Elizabeth Fogerty, +1-212-908-0526
[email protected]

Source: Fitch Ratings

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