Colombian energy companies downgraded

Company News    May 24, 2021 3:34 PM

S&P Global Ratings announced the downgrade rating of more than five Colombian entities due to the loss of investment grade.

Colombian companies downgraded to ‘BB+’ from ‘BBB-‘, La Republica reported. Isagen, Grupo Sura, Enel Americas, Ecopetrol (NYSE: EC), Ocensa, among others were the affected firms.

The rating agency explained that Isagen sells about 35% of its energy to distributors, which have their rates set by the regulator.

S&P said that payments to Isagen–in case of a regulatory interference in distributors’ rates–could deteriorate.

“In addition, Isagen sells a portion of its output on the spot market, which could also be at its regulatory floor amid recession. Therefore, the sovereign rating caps the rating on Isagen,” S&P said.

S&P believes that Grupo Sura would not pass a Colombian sovereign default stress test scenario.

“The sovereign rating cap and risk to Grupo Sura in a sovereign default scenario reflect the high correlation between the company’s assets and dividends, and the country’s economy, because around 40% of assets operate mostly inside Colombia,” the rating agency explained.

The agency said that Grupo Sura is exposed to Colombia’s financial system because the group has a stake in Bancolombia, which represents approximately 25% of the dividend stream.

S&P predicts around 35% of Enel Americas’ EBITDA to come from Colombia in 2021, followed by Brazil (about 45%), Peru (15%), and Argentina (5%).

The rating agency recalled that Enel Americas and Emgesa have ratings above that on Colombia’s sovereign rating, and S&P downgraded them to ‘BBB-‘ from ‘BBB’.

S&P explained that the ratings on both entities are higher than on Colombia’s sovereign rating, primarily because of the potential support they would receive in case of financial distress from their parent companies.

“Although Enel Americas’ debt repayment capacity remains stronger than those of the sovereigns where it operates, mainly because of the potential support it would receive from its parent company Enel in case of financial distress, the company’s downgrade reflects its sensitivity to deteriorating country risks,” S&P said.

The agency said that the rating action on Emgesa follows the one on Enel Americas, given that the former plays an important role in the latter’s strategy in Latin America. Therefore, S&P expects the latter to support Emgesa under any foreseeable circumstance, including a hypothetical sovereign default of Colombia.

S&P recalled that Colombia’s government is a controlling shareholder in the Ecopetrol case.

“Therefore, ratings on the company and its subsidiaries move in tandem with those on the sovereign,” S&P said.

Bottom-Line: The reduction of the country’s sovereign debt rating from investment grade to junk is having serious implications for the county and the economic sectors. See a full analysis of this situation here.

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