Fitch Downgrades HQI Transelec Ratings to 'BBB-'; Outlook Stable.

CHICAGO -- Fitch Ratings has downgraded the Issuer Default Rating (IDR) and senior unsecured debt ratings of HQI Transelec S.A. (Transelec) to 'BBB-' from 'A-' as well as the national scale rating to 'A(chl)' from 'AA(chl)'. Approximately US$800 million in debt securities is affected. The Rating Outlook is Stable.

The rating downgrades reflect the leveraging effects of Transelec's acquisition by a consortium of investors led by Brookfield Asset Management (BAM). The consortium acquired Transelec for approximately US$2.7 billion, including the assumption of approximately US$900 million in debt obligations. BAM funded the acquisition with a combination of cash equity totaling US$1.2 billion and a US$600 million bridge loan at a newly created holding company. As part of the permanent financing plan, BAM intends to refinance a majority of the acquisition debt and move it to the operating company level, which will increase leverage and weaken the company's credit protection measures. Operating company leverage is expected to be consistent with the 'BBB-' IDR rating category and given Transelec's low risk operating profile.

Any remaining or future holding company debt will be structurally subordinated to the debt at Transelec. Debt service of holding company debt will rely on residual operating cash flow from the operating company in the form of dividends. Operating company creditors are expected to be provided additional protections in the form a covenant package that includes limitations on additional indebtedness and a negative pledge on assets. Transelec's total consolidated debt to operating EBITDA ratio is expected to increase from 4.3 times (x) at June 2006 to close to 7.0x on a pro forma basis, including holding company debt; debt is estimated to climb from US$856 million at June 30, 2006 to US$1,456 million. Fitch expects that the operating company debt to operating EBITDA ratio may be lower than that of the consolidated levels.

Transelec's investment grade ratings reflect the company's low business risk profile as an electric transmission utility, the improved regulatory environment since the approval of the Short Law in early 2004, and high financial leverage. The company's revenues and cash flow are extremely stable and are concentrated in financially solid generation companies. The majority of the revenues received are under long term contracts (approximately 62%), with the remaining coming from regulated tariffs. Revenues are not exposed to market based risk such as price and volume. As contract revenues roll-off and are replaced with regulated tariffs, the Short Law should result in greater certainty in the determination of regulated transmission revenues and returns on future investments.

Fitch expects Transelec will continue to generate predictable revenues and maintain a stable cost structure, resulting in a stable EBITDA close to US$200 million. Transelec's EBITDA is expected to gradually increase by 2007, reflecting the addition of six trunk-line upgrade projects (approximately an US$84 million investment), and two new projects (approximately US$20 million), which would be financed with cash flow from operations. Through June 30, 2006, Transelec's financial profile continued to show stable and predictable cash flow generation. Transelec reported EBITDA-to-interest expense of 3.1x, and debt-to-EBITDA of 4.3x compared with 2.9x and 4.5x at June 30 2005, respectively. Transelec faces debt amortizations of US$202 million in March 2007 from a total debt of US$856 million. The company has manageable capital expenditures, which are expected to be funded with internal cash flows.

The BAM consortium includes Brookfield Asset Management Inc. (27.3%) who leads the consortium, the Canada Pension Plan Investment Board (27.3%), British Columbia Investment Management Corporation (27.3%), and an institutional investor (18.2%).

BAM is an asset management company, focused on property, power and infrastructure assets, which currently has US$50 billion assets under management. BAM's current power operations include 3,500 MW of hydro generating plants located in North America and Brazil, and regulated transmission and distribution business in northern Ontario.

Transelec owns and operates most of the electricity transmission lines and substations of Chile's trunk transmission system in the Central Interconnected System (SIC), as well as a portion of the high-tension lines in the Northern Interconnected System (SING). Transelec is 92%-owned by BAM Consortium and 8%-owned by International Finance Corporation (IFC).

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.