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Hidroelectrica Piedra de Aguila's US$194.6 Million Exchange Offering Rated 'B+' by DCR.

CHICAGO, Oct. 8 /PRNewswire/ -- Duff & Phelps Credit Rating Co. (DCR) has assigned a credit rating of 'B+' (Single-B-Plus) to Hidroelectrica Piedra del Aguila S.A.'s (HPDA) Series I Trust Notes and Series II Trust Notes offered to existing bondholders in exchange for outstanding eurobonds. The exchange offering is part of an overall financial restructuring of the company. The trust notes will represent new senior obligations of the company. Following a successful exchange of the new trust notes, DCR will withdraw its rating of the existing eurobonds.

The debt restructuring is positive as it will address and improve the company's capital structure, lower future refinancing risks and better match debt maturities with the life of the assets. The new debt structure will reduce the company's average annual interest rate from 9.8 percent in 1998 to 8.1 percent in 2000 to help offset the impact of an increased tax burden. Additionally, the new structure will materially extend average life of the company's debt.

The exchange offering is structured to, and should, provide the company with sufficient cash flow to meet its debt maturities based on conservative estimates of annual production (4,600-4,800 GWh) under more normal hydrological conditions. Variations in hydrology from year to year are mitigated by a payment deferral mechanism and excess cash flow recapture agreement with the banks, which provides HPDA with financial flexibility in the event that cash flow in any future given year is lower than expected. HPDA's potential reliance on the deferral of debt payments to banks to remain current on its obligations to bondholders has been incorporated into the rating. Debt service coverage ratios are thin and are commensurate with the 'B+' rating assigned to both series of trust notes.

Under the debt restructuring, HPDA is offering each holder of existing notes the right to exchange each US$1 principal amount of existing notes for a combination of US$.50 principal amount of Series I Trust Notes and US$.50 principal amount of Series II Trust Notes.

The Series I trust notes represent a US$97.3 million, 10-year amortizing note at 8.0 percent; Series II trust notes represent a US$97.3 million, 10-year bullet note at 8.25 percent. Positively, scheduled payments on the refinanced bank loans and on the trust notes have been more closely aligned with projected cash flows of the company, thereby strengthening the economic viability of the company over the term of the repayment period. Throughout the restructuring HPDA has proposed debt structures that avoid reducing principal due to creditors.

The Trust Notes are ratably secured with the bank loans by a second degree trust assignment on revenues to HPDA from sales to CAMMESA and a lien on revenues from contract sales; and a second degree pledge on the 51 percent of HPDA capital stock and first degree pledge on the 8 percent of HPDA capital stock held by the primary shareholder, Hidroneuquen.

Noteholders do not have the right to change the amount or proportion of Series I or Series II Trust Notes received in exchange for the existing euro notes. For the exchange to be completed, at least 97 percent of existing notes outstanding must be tendered. Should the notes not be tendered, the company would likely lose its concession, which would occur if the company were declared bankrupt or upon a declaration of default by Banco Nacion. Under such a scenario, the Argentine government would auction the concession, with the company only receiving a relatively small percentage of the proceeds (less than 40 percent if the auction occurred in 1999) with which to pay employee compensation, bankruptcy costs and taxes and then to distribute among all unsecured creditors.

The exchange offering is part of an overall financial restructuring of the company and is a result of the recent payment defaults by the company on principal and interest due to bank lenders and bondholders. At December 31, 1998, the company had US$423 million in debt outstanding, and faced interest, principal and tax payments in 1999 of US$192.4 million. In the first quarter of 1999, HPDA suspended payment of its financial obligations in response to a severe liquidity crisis faced by the company.

The company has reached an agreement with all of its bank lenders, whereby the bank lenders will refinance their outstanding bank loans of $125 million. HPDA has also obtained a commitment, conditioned on a successful overall restructuring of liabilities, for a US$35 million cash contribution from some of the existing shareholders, which would be given in exchange for subordinated trust notes, in an equal principal amount, that will be subordinated to all other creditors of the company.

Due to the combination of reduced liquidity in the international bank and capital markets and poor financial performance, HPDA was unable to refinance its existing debt. HPDA's financial performance has been adversely impacted over the last few years by reduced energy output and lower energy prices, due to poor hydrological conditions and significant excess generating capacity in Argentina, respectively. Restrictions on electricity transmission between the Comahue region and Buenos Aires have exacerbated the overcapacity situation in the region and resulted in local pricing that is even lower than spot market prices. Additionally, tax reforms passed in December 1998 increased HPDA's asset tax obligations by US$13.6 million for 1999 and are expected to reduce future cash flow by approximately US$6 million annually.

Given HPDA's reliance on rainfall and reservoir levels, cash flow from operations will likely remain volatile as energy sales and electricity prices fluctuate from variations in hydrological conditions. Going forward, operating performance is expected to improve as hydrology returns to more normal levels on average. Assuming conservative generation levels during normal hydrological years by HPDA of approximately 4,600 GWh to 4,800 GWh annually, interest coverages and debt service coverages are expected to average approximately 2.0 times and 1.1 times, respectively. Positively, in periods of deficit cash flow the terms of the restructured bonds permit HPDA to defer the amortization of up to US$13 million for the notes held by the private bank creditors, and up to US$19 million for the loan held by Banco Nacion. The payment deferral to the banks should provide HPDA with sufficient operating and financial flexibility to pay bondholders.

HPDA is the largest private hydroelectric generator in Argentina. The company holds a concession until December 29, 2023, from the Argentine government to operate its hydroelectric facility and for the generation and sale of electricity. HPDA is located approximately 1,200 km southwest of Buenos Aires on the Limay River on the boarder between Neuquen and Rio Negro provinces. HPDA is a low marginal cost producer of electricity, which affords it a high dispatch priority. HPDA operates in an extremely competitive generation market and sell approximately 70 percent of its generation in the spot market in a normal hydrological year. During 1998, HPDA sold 1,199 GWh under contract and 1,721 GWh on the spot market and had net revenues of Ps.65.8 million.

Duff & Phelps Credit Rating Co. (DCR) is a leading global rating agency with 33 local market offices providing ratings and research on debt issues and insurance claims paying ability in more than 50 countries. For additional information on HPDA and the Exchange Offer, visit DCR's Web site at (Quick Search: HPDA). DCR's research is also available on Bloomberg at DCR<GO> and First Call's BondCall Direct/Research Direct at, as well as through other third-party providers.
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Publication:PR Newswire
Date:Oct 8, 1999
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