OREANDA-NEWS. Fitch Ratings expects to assign a rating of 'A(EXP)' to Empresa Nacional del Petroleo's (ENAP) proposed senior unsecured debt issuance of USD700 million due 2026. A full list of ENAP's ratings follows at the end of this release.

ENAP intends to use proceeds from the proposed notes to fund the tender offer for up to USD600 million of the company's bonds with maturities in 2019, 2020 and 2021; the remaining proceeds will be used to finance working capital and for general corporate purposes. ENAP announced the tender offer on July 19, 2016. The tender offer expired yesterday. After the tender, the principal amount outstanding of the 2019, 2020 and 2021 notes will be USD700 million.

The notes will rank pari passu in priority of payment with all other ENAP's senior unsecured debt. The notes would be rated the same as all of ENAP's senior unsecured obligations. As in the rest of ENAP's long-term financing, the only covenant for this debt issuance is a change of control clause.

KEY RATING DRIVERS

ENAP's ratings reflect its 100% ownership by the Chilean state and the sound credit profile of its parent. The company has strong legal, operational and strategic ties with the state, and possesses strategic importance to Chile given it assures a significant portion of the country's energy supply. ENAP owns 100% of the refining capacity of the country with 230 thousand barrels per day, meeting approximately 59% of the internal demand, and representing around 30% of the country's energy matrix. As a state-owned company, ENAP's Foreign Currency Issuer Default Rating (FC IDR) is strongly linked with the credit profile of the Chilean sovereign (FC IDR 'A+'/Outlook Stable), although direct financial support provided by the government has been limited.

--Strong Government Support

ENAP's ratings reflect the company's 100% ownership by the Chilean state and the strong credit profile of its parent, and Fitch's analysis includes the assumption that the State of Chile will continue to provide timely and sufficient support to the company in the event of financial distress. The Chilean government is strongly involved in ENAP's business as the Ministry of Finance approves ENAP's budget and any new debt assumed by the company; additionally, the Minister of Energy is president of the company's board. In 2015, government support materialized in the form of a payment of close to USD90 million as compensation for subsidies granted by ENAP for natural gas consumption in the Magallanes region. Additionally, the government's energy agenda announced in 2014 included a USD400 million capital increase for ENAP, which will be made in conjunction with a Corporate Governance law for the company that, submitted to Congress in January 2016. This bill is currently under consideration by the Chilean House of Representatives.

Finally, the Chilean Government has stated that ENAP will be the vehicle through which the state will promote investments in several segments of the electric / oil & gas market in Chile. In February 2016, the government enacted law 20.897 allowing ENAP to participate in power generation. In the past, government support has been reflected in a temporary capitalization of retained earnings at ENAP's subsidiaries since 2009 (and approved until 2017), suspension of dividend payments over the past seven to eight years, and a USD250 million equity injection in 2008. Although the Republic of Chile does not explicitly guarantee any of ENAP's indebtedness, all of the financial debt has a Change of Control Clause.

--EBITDA Generation Expected to Normalize

During 2015, ENAP's cash flow generation has come well above Fitch's expectations in spite of the sharp reduction of international oil prices. As of the last 12 months period (LTM) ended March 2016, ENAP recorded an EBITDA of USD731 million. As prices recover, refining margins are expected to stabilize and compress. Going forward, ENAP's normalized EBITDA is projected in the range of USD550 million to USD650 million, at least until 2018-2019, when investments in improving the refining capacity mix are expected to improve the company's cash flows. Current investments in E&P in Argentina and Magallanes, and in power generation in Chile are also expected to improve the company's EBITDA generation.

--Improving Credit Metrics

Although ENAP's financial performance has improved since 2013, leverage remains high for the rating category and Fitch does not foresee any room for deleverage for the next few years. For the LTM ended March 2016, leverage measured as debt to EBITDA was 5.2 times (x), decreasing from 6.3x as of year-end 2014 (YE14), with interest coverage ratio of 4.4x.

EBITDA generation for 2015 reached historical highs mainly attributable to an improvement in refining margins offsetting the limited negative impact on E&P margins. The limited exposure that ENAP's E&P business segment has to international oil prices has strongly mitigated the impact of the collapse in prices. Only operations in Egypt (25% of the company's E&P production) are exposed to international prices. Additionally, the company hedges most of its exposure to crude oil price volatility between the moment the crude oil is bought and the time it is sold through time spread swaps and other hedging instruments, protecting the business' margins.

Fitch expects the company will maintain high leverage for its rating category in the 6.0x-6.5x times assuming a normalized EBITDA of USD550 million-USD650 million. Fitch anticipates continued strong parent support, which could include the assumption of the USD400 million in 2017. Metrics are expected to improve over the mid-term.

KEY ASSUMPTIONS

Fitch's key assumptions within the rating case for the issuer include:

--2016 consolidated capex of USD650 million;

--USD400 million capital injection for 2016-2017;

--Subsidies for gas consumption in the Magallanes Region remain in place;

--Continuous state support.

RATING SENSITIVITIES

ENAP's ratings could be negatively affected by a downgrade of the Chilean Sovereign rating. In addition, any weakening of legal, operational and/or strategic ties with the government could put downward pressure on ENAP's ratings.

A positive rating action is not envisioned due to the company's weak capital structure and financial profile for its rating category.

LIQUIDITY

ENAP's liquidity remains relatively weak, although it has showed an important improvement over the past two years, as the company refinanced a large portion of its short-term debt and improved its debt maturity profile. Cash on hand as of March 31, 2016, amounted to USD302.8 million, while short-term debt was USD543 million. ENAP's liquidity is reinforced by committed lines of credit for close to USD100 million.

Financial maturities for the next three years (2016-2018) are manageable and range between USD280 million and USD410 million per year. In 2019, ENAP will face maturities for USD702 million, mainly bonds. The tender offer in combination with the proposed issuance will allow the company to refinance in advance upcoming maturities. Fitch does not see this as a major risk due to the company's proven access to the financial markets. Fitch expects access to local and international markets to remain strong and based on a strong government support.

FULL LIST OF RATING ACTIONS

Fitch currently rates ENP as follows:

--Long-Term Foreign Currency Issuer Default Rating (IDR) 'A';

--Senior unsecured notes USD 300 million due 2019 at 'A';

--Senior unsecured notes USD 500 million due 2020 at 'A';

--Senior unsecured notes USD 500 million due 2021 at 'A';

--Senior unsecured notes USD 600 million due 2024 at 'A';

--Senior unsecured notes CHF 215 million due 2018 at 'A';

--National Scale Long-Term Rating at 'AAA(cl)';

--Senior unsecured notes CLF 9.75 million due 2019 at 'AAA(cl)';

--Senior unsecured notes CLF 2 million due 2017 at 'AAA(cl)';

--Senior unsecured notes CLF 4 million due 2033 at 'AAA(cl)';

--Bond Program 303 at 'AAA(cl)';

--Bond Program 585 at 'AAA(cl)';

--Bond Program 823 at 'AAA(cl)'.