Fitch Ratings – Mexico City – 08 Jul 2024: Fitch Ratings has affirmed the Interchile S.A.’s (Interchile) USD1.2 billion senior secured notes due in 2056 at ‘BBB+’. The Rating Outlook is Stable.

Interchile’s rating reflects a transmission line portfolio with mostly regulated revenues subject to limited fines in case of outages caused by non-compliance. The revenue profile is hybrid, with fixed prices during the first 20 years of operation, followed by a tariff reset phase every four years, which exposes the transaction to price risk. Counterparty risk is favorably viewed as systemic and commensurate with Chile’s sovereign rating (A-/Stable). The rating also considers the assets’ long useful life and relatively simple operation, with highly predictable operations and maintenance (O&M) costs representing a small portion of revenues, but with significantly concentrated lifecycle costs.

The debt structure has standard debt reserves and distribution tests. Fitch’s rating case debt service coverage ratios (DSCRs) average 1.50x through the debt term, with a minimum of 1.27x in 2044, helping mitigate increased price risk exposure after the first fixed tariff phase. The all-cost breakeven expressed as a multiple of a 10% realistic outside cost (ROC) is 16.3x. The mixed revenue profile, metrics, and cost breakeven are robust for the assigned rating according to applicable criteria but constrained due to Fitch’s perception of risk associated with tariff adjustments and the back-loaded debt amortization profile.

KEY RATING DRIVERS

Cost Risk – Midrange

Concentrated Life Cycle Costs [Scope Risk: Midrange]: The complexity of O&M work is deemed low, and asset useful life is expected to exceed the debt tenor. However, lifecycle costs (LCC) are significantly concentrated, with peak periods at levels above 10% of revenues.

Experienced Operator [Cost Predictability: Stronger]: The sponsor is highly experienced in the asset type and similar regions and has demonstrated stable O&M costs. Equipment and technology employed are widely utilized in transmission projects. The independent engineer (IE), Black & Veatch, provided a high-level cost analysis including adequate benchmarks and confirmed that multiple experienced contractors are available in the region for replacement, if necessary.

Limited O&M Reserve [Cost Volatility and Structural Protections: Midrange]: The O&M costs represent a small portion of revenues, are fixed in nature, and are expected to increase primarily in line with Chilean inflation. Nonetheless, the debt structure provides limited protection through a one-month O&M reserve (OMRA). In addition, there is no dedicated major maintenance reserve account (MMRA), but the debt terms allow for permitted indebtedness to fund capex requirements if needed.

Revenue Risk – Midrange

Hybrid Revenue Profile: Interchile benefits from 20 years of fixed prices indexed to U.S. and Chilean inflation and the USD/CLP exchange rate, mitigating the asset’s exposure to price risk in this phase. Revenues are then exposed to an established tariff readjustment mechanism where prices reset every four years. Only Project 3, which accounts for 3% of revenues, is exposed to this mechanism starting in the 2020-2024 period.

In every reset period, tariffs are set according to the market costs to build, operate and maintain a new transmission line. Tariff volatility derives from commodities price fluctuations, as most cost components are linked to inflation. Offtake risk is predominately viewed as systemic. Revenue is exposed to 30-day currency depreciation spikes, mitigated by the sponsor’s track record managing this risk.

Debt Structure – 1 – Midrange

Fully Amortizing Debt; Back-loaded Profile: The debt is senior secured, fixed-rate, and fully amortizing. It benefits from a seven-year grace period of principal payments, forward-looking six-month debt service reserve account and one-month OMRA. Debt includes a 1.15x backward and forward distribution lock-up test and strong provisions to limit the incurrence of additional debt, including a rating affirmation and a minimum DSCR covenant of 1.25x during the fixed-tariff phase and of 1.35x during the resettable tariff period. Amortization profile is back-loaded, with approximately 80% concentrated in the last 15 years of the debt tenor, deemed as a negative feature.

Financial Profile

Fitch’s rating case considers a 10% haircut over the investment value of the transmission assets (VI) during the resettable period, a 1% availability haircut, and a 10% O&M and capex stress. Minimum and average DSCRs are 1.27x (2044) and 1.50x (2024-2056), respectively; the ROC multiple is 16.3x. Metrics are considered robust for the assigned rating per applicable criteria, but constrained due to the project’s hybrid revenue profile.

In addition, the tailored amortization schedule yields mostly flat DSCRs throughout the whole tenor where the strong average DSCR of 1.44x (2038-2056) protects investors against unforeseen declines to regulated tariffs.

PEER GROUP

Interchile’s closest peer in the region is Atlantica Transmision Sur S.A. (BBB/Negative), a Peruvian transmission line that has an average DSCR of 1.59x under the rating case. Both projects have midrange assessments for revenue and cost attributes. While Atlantica shows higher coverages than Interchile, Atlantica’s rating is constrained by Peru’s sovereign rating (BBB/Negative) as Fitch views offtake risk as systemic risk that is commensurate with Peru’s sovereign risk.

RATING SENSITIVITIES

Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade

–Cost overruns or revenue deductions leading to observed DSCR coverage levels consistently below 1.30x;

–An increase in Fitch’s perception of risk associated with future tariff adjustments;

–Multi-notch downgrade on Chile’s sovereign rating.

Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade

–An upgrade is unlikely in the short term due to uncertainty associated with long-term revenues volatility derived from the ongoing estimation of tariffs prepared by the National Energy Commission (Comision Nacional de Energia; CNE).

SECURITY

Interchile owns a strategic portfolio comprising 11 transmission projects, including 1,954 kilometers (km) of circuit lines under operation and construction. The transmission assets operate under perpetual decrees awarded by the Chilean Ministry of Energy and are part of the country’s national transmission system. As such, the senior notes are supported by the cash flow generation of 11 electric transmission line decrees and are secured by substantially all of the material issuer’s assets, including all rights to receive monies according to decrees and contract, certain tangible assets, and all real estate rights of the issuer’s projects.

Interchile was established in 2012, is headquartered in Santiago, Chile, and is ultimately owned by the Colombian sponsor, Interconexion Electrica S.A. E.S.P. (BBB/Stable). Interchile began generating revenues in 2017 and has demonstrated the ability to control operating expenses by registering EBITDA margins of around 85%.

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

ESG CONSIDERATIONS

The highest level of ESG credit relevance is a score of ‘3’, unless otherwise disclosed in this section. A score of ‘3’ means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch’s ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch’s ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores.