OREANDA-NEWS. Fitch Ratings has affirmed the local and foreign currency long-term Issuer Default Ratings (IDR) of Consorcio Transmantaro S.A. (CTM) at 'BBB-'. The rating action includes the affirmation of the company's international bonds outstanding totaling USD450 million due 2023.

The Rating Outlook is Stable.

KEY RATING DRIVERS

CTM's ratings primarily reflect the company's stable and predictable cash flow generation and improving regulatory risk. Fitch further expects a sharp improvement in cash generation and leverage as CTM's expansion plans are completed in the next 12-24 months. Finally, the ratings also consider the implicit support from CTM's shareholders, Interconexion Electrica S.A. E.S.P. (ISA; rated 'BBB', Outlook Stable) and Empresa de Energia de Bogota S.A. E.S.P. (EEB; rated 'BBB', Outlook Stable), which at times have supported the company through subordinated intercompany loans and direct support for project developments. Fitch expects the company's shareholders to continue providing support to CTM as it engages in an ambitious expansion program.

Stable and Predictable Cash Flow Generation:

CTM's ratings reflect the company's stable and predictable cash flow generation, characteristic of electricity transmission companies, derived from its fixed revenues and stable costs. The company operates six transmission lines under different concession agreements, BOOT contracts, granted by the Peruvian government; these concessions have a remaining life between 18 and 30 years. CTM generates revenues from granting access for electric generation and distribution companies to its transmission lines at fixed rates set during the initial bidding process for the concession and annually adjusted by U.S. PPI. CTM is not exposed to volume risk as its revenues are not dependent on the amount of electricity transported but the availability of its transmission lines.

Leverage Driven by CAPEX Program:

CTM is in the middle of a major investment period, constructing four new transmission lines, and spurring an increase in leverage that Fitch expects will rise to around 7.0x at its peak. In 2015, the company generated EBITDA of USD96.3 million on USD261.7 million of reported revenues, for an EBTIDA margin of 36.8%. With a USD65 million increase in gross debt to USD609 million, the company ended the year with a gross leverage of 6.3x (flat versus 2014). By year-end 2017 and following the completion of the existing portfolio of projects, CTM adjusted EBITDA should range between USD140 million and USD150 million, with leverage falling below 6.0x, absent any further capex-related debt increases.

Currently, CTM has concession contracts to develop four new transmission lines that are expected to require approximately USD439 million of additional investments over the next two years, for total investments of USD575 million during the 2015-2017 construction period. Current funding assumptions for the three-year capex plan include 20% equity, 35% internal cashflow , and the remainder through debt. Consequently, the company maintains only a nominal cash account (USD3.3 million at year-end 2015). In non-construction years, Fitch expects the company to distribute excess cash as dividends.

Moderate to Low Regulatory Risk:

A portion of CTM's revenues are subject to annual regulatory review, which exposes the company's revenues to potential changes to regulated tariffs. Additionally, the company's main concession, the Mantaro-Socabaya transmission line, was granted under a regulatory scheme that allows the Peruvian government to adjust downward the rate of return used to calculate the underlying annuity of this concession. This risk is low to moderate given the track record of the regulator and the small proportion of cost transmission represents in total electricity cost passed on to the final consumer.

The Mantaro-Socabaya transmission line accounted for 45% of company's transmission revenues in 2015; the remaining 55% of revenues was derived from concessions under the new regulatory scheme and bilateral contracts for complementary transmission lines. The new scheme establishes a fixed annual return on the investment for the life of the concession; the rate is set during the bidding process. Fitch expects that as additional transmission lines under the new scheme become operational over the next three years--particularly the 920km Mantaro-Marcona-Socabaya-Montalvo line--, Mantaro-Socabaya's revenue contribution should shrink to around a quarter of total revenues.

CTM of Strategic Importance for the Country:

CTM's main transmission concession is the Mantaro-Socabaya line, which created the national interconnected system (SEIN), services almost all of the country's population. CTM has an approximately 33% market share based on revenues and, together with its sister company REP, the two companies accounts for approximately two-thirds of the transmission market in Peru. Future expansions for the group are expected to be developed by CTM.

Positive Shareholders Support:

CTM is owned 60% by Interconexion Electrica S.A. E.S.P. (ISA; rated 'BBB', Outlook Stable) and 40% by Empresa de Energia de Bogota (EEB; rated 'BBB', Outlook Stable). CTM's shareholders have historically supported the company through equity injections, subordinated intercompany loans and explicit equity injection pledges for some of the company's electric transmission construction projects. The company also benefits from its relationship with its sister company, REP, with which it shares its management team. Going forward, Fitch expects cash injections from CTM's shareholders, no dividends during expansion projects and for CTM's shareholders to continue providing equity pledges for the company's future projects.

KEY ASSUMPTIONS
--Complete drawdown of USD250 million loan in 2016 and 2017;
--Completion of all major projects by 2017;
--Excess cash above approximately USD3.5 million to be paid out as dividends after construction period;
--Capital injection of USD130 million in 2016 from shareholders;
--Moderate improvement in cost structure as projects come online.

RATING SENSITIVITIES
Although a negative rating action is not expected in the short term, failure to maintain leverage below 7.0x and close to 6.0x over the medium term could result in a negative rating action or outlook. This could occur if the company increases the proportion of debt used to finance expansion projects or it lowers the expected return on new expansion projects in order to win more concessions.

A positive rating action could occur if the company lowers its leverage level below 5.0x on a sustained basis.

LIQUIDITY

In 2015, the company entered into an agreement for a USD250 million bank loan that will begin amortizing at the end of 2017 through 2027. As of today, the company has accessed nearly USD80 million of the available funds under that loan. Assuming its complete drawdown by the end of 2017, approximately 81% of financial debt matures after 2021. Fitch expects excess liquidity above approximately USD3.5 million to be used to fund construction or to be distributed as dividends once the company has completed its construction phase.

FULL LIST OF RATING ACTIONS

Fitch has affirmed the following ratings:

Consorcio Transmantaro
--Foreign currency and local currency long-term Issuer Default Ratings at 'BBB-';
--Senior unsecured notes due 2023 at 'BBB-'.

The Rating Outlook is Stable.