OREANDA-NEWS. Fitch Ratings has assigned a 'BB' rating to The AES Corporation's (AES) issuance of \$575 million senior unsecured notes due in 2025. The Rating Outlook is Negative.

The notes are senior unsecured obligations of AES and rank equally with all other unsecured obligations of the company. AES will use net proceeds from the notes to redeem up to \$500 million of its outstanding senior unsecured notes, including 8.00% senior notes due in 2017 and 2020, and 7.375% senior notes due 2021.

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.

KEY RATING DRIVERS

Deleveraging is Critical: 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.

Cash-flow Diversity Drives Credit Profile: AES owns a portfolio of electric utilities and power generating assets across five continents. Historically, its cash flow included distributions from over 50 projects in any given year. Investment diversity shields the company from the macro and micro economic environment adversity affecting a local domestic electricity sector. Additionally, growth through investment in contracted assets improves cash flow quality.

Quality of Cash flow: Fitch expects at least 70% of AES' cash flow through 2016 will be from investments in operating utilities and contracted generation facilities. Distribution from utilities and contracted generating assets improve AES' overall cash flow quality as these businesses provide long-term cash flow visibility and predictability. The average remaining life of its power sale contracts is about seven years.

Geopolitical Risks Affect Credit Profile: AES owns and operates electricity utility businesses in more than 18 countries that are subject to foreign exchange rate volatility and adverse global macro-economic conditions. In addition, governmental policy in these countries regarding electricity tariffs, sector growth, currency controls, and foreign direct investment also increase its business risk profile. These risks are reflected in AES' credit profile for its current IDR.

High Counterparty Credit Risks: AES continuously faces high default risk in sub-investment grade countries, adversely affecting its subsidiary level cash flow. These risks are common in emerging economies where state finances and property rights are weak. Fitch's forecast is adjusted for these uncertainties and they are reflected in its IDR.

Aggressive Shareholder Distribution Policy: 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.

RATING ASSUMPTIONS

--Fitch adjusts parent level cash flows for sovereign and merchant risk. The cash flow reduction in expected distributions ranges between 2% and 6%.
--Corporate overheads are increased by 2% for 2015 and 2016.
--A 6% interest rate is used for new debt issuance through 2016.

RATING SENSITIVITIES

Positive Rating Action: Positive rating action for AES is unlikely at this time.

Negative Rating Action: Future developments that may, individually or collectively, lead to negative rating action include:

--Inability to Reach Targeted Credit Metrics: A failure to achieve APOCF/interest higher than 2.5x and adjusted debt/APOCF of 5.5x or lower on a sustainable basis;

--Deterioration in Distribution Received: Any downward shift in the current distributions from its subsidiaries would adversely affect AES' ratings. Any increase in shareholder distributions without an absolute reduction in debt will also be a cause for the rating downgrade;

--Increase in Business Risk Profile: A change in strategy to invest in more speculative, non-contracted assets or fall in cash flow from contracted power generation assets.