New York, July 1, 2002 — Moody’s Investors Service downgraded the senior unsecured debt of The AES Corporation to Ba3 from Ba1.
Other ratings downgraded include the company’s senior and junior subordinated debt to B2 and preferred stock to Caa1. Moody’s also assigned a Ba3 senior implied rating. The ratings remain on review for possible further downgrade.
The rating action reflects concern about diminished future dividends from subsidiaries and investment interests, the impact of weaker power prices on the merchant portion of AES’ generation business, and deteriorating conditions in several international power markets in which the company has substantial investments.
Moody’s believes that cash flows from the company’s Latin American investments will remain volatile and these assets are likely to contribute significantly lower dividends to AES over the medium term. The combination of these factors results in a prospective increased reliance upon additional asset sales at a time when this market is becoming less favorable.
Moody’s continuing review will focus on the volume and reliability of cash to be derived from various investments, the timing and likely proceeds derived from asset sales, and company actions to support its liquidity position.
AES last week appointed a new CEO, and appears to have a strong commitment to a debt reduction strategy. Its multi-year capital spending plans have been dramatically reduced, the company is seeking to sell certain assets, and it is pursuing various initiatives to reduce its cost structure.
This includes plans to reduce its investments in Latin America and in merchant generation, in order to reduce the volatility of its future cash flows. This goal will be difficult to achieve in the near term market environment. In Moody’s opinion, the environment for power asset sales is becoming distinctly less favorable as an increasing number of sellers compete for buyers. In addition to an oversupply of asset inventory, it is becoming more difficult for prospective purchasers to access capital.
Also, some of the company’s assets are located in regulatory environments which are difficult or less familiar to potential buyers.
The company has announced agreements for the sale of Cilco and AES NewEnergy. Expected proceeds totaling $ 780 million for these asset sales are expected to be received in the fourth quarter or the first quarter of 2003, in advance of the maturity date of the company’s $850 million bank revolving credit agreement. Proceeds from these asset sales are critical for the company’s liquidity position. While there are execution risks around these asset sales, and risks around the timing, Moody’s notes that agreements have been executed. AES is a global power company, with investments in generation and distribution assets around the world.