Fitch: AES' Ratings Unaffected by the Recent Share Repurchase

NEW YORK--(BUSINESS WIRE)-- The AES Corporation's (AES, IDR 'BB-'; Outlook Negative) ratings will not be affected by the company's buyback of 20 million shares from China Investment Corporation's (CIC) subsidiary, Terrific Investment Corporation, for up to $265 million, according to Fitch Ratings.

The Ratings Outlook will remain Negative. The share purchase will accelerate the current share repurchase program, but will remain within its current share buyback program's limits. Currently about $380 million (before the purchase of CIC owned shares) is available under AES' board authorized share buyback program. Any share buyback in excess of currently authorized limit without a corresponding reduction in the parent level debt will be negative for AES' credit profile.

Fitch had revised the Rating Outlook for AES to Negative from Stable in December 2014 following the dilution of its ownership in IPALCO Enterprises, Inc. (IPALCO), which Fitch considered to be a credit supportive core holding. AES' sale of equivalent of a 30% economic interest in IPALCO reduced what Fitch Ratings had expected to be a growing source of high quality, predictable cash flow through additional equity investments into Indianapolis Power & Light Co. (IPL), a wholly-owned subsidiary of IPALCO.

Fitch will likely resolve the Negative Rating Outlook after reassessing AES' portfolio strategy, forecasted cash flow profile, and leverage targets. Fitch expects further reduction in parent company debt as AES lessens its reliance on U.S.-domiciled regulated businesses. Even though the annual dividends received by AES are from a diverse set of investments, distributions from domestic utilities, and contracted assets improve overall cash flow quality and support the current IDR. Fitch expects AES' adjusted parent-only cash flow (APOCF) based leverage to remain at or below 5.5x.

In February 2015, AES' board of directors approved a new $400 million share repurchase program. In December 2014, AES' board increased quarterly dividends to $0.10 per share from $0.05 per share, with an expected annual growth rate of 10%. The new dividend policy became effective in the first quarter of 2015. Increase in shareholder friendly activities without an absolute reduction in leverage remains a rating concern.

Adjusted Parent Only Cash Flow

Fitch analyzes AES as a holding company owning a portfolio of assets and investments in a global electricity sector given its somewhat unique corporate profile and structure. Financially, this represents a deconsolidated approach with respect to AES' cash flows and debt levels. Fitch uses adjusted parent operating cash flows (APOCF), a non-GAAP measure, with its emphasis on dividends received and return on capital, to analyze AES' credit metrics. This approach, similar to the method used by AES' lenders in financial covenants, recognizes that the subsidiaries are encumbered by individual debt that is structurally superior to the debt of the corporate parent. The residual subsidiary cash flow available for upstream dividends and distributions has greater volatility than the direct cash flow of the operating subsidiaries, and may be subject to payment restrictions under subsidiary debt covenants, corporate by-laws, or national laws.

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

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Fitch Ratings
Primary Analyst
Roshan Bains
Director
+1-212-908-0211
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Media Relations:
Alyssa Castelli, New York, +1 212-908-0540
Email: [email protected]
Elizabeth Fogerty, New York, +1 212-908-0526
Email: [email protected]

Source: Fitch Ratings

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