Fitch Ratings has affirmed Generacion Mediterranea S.A.'s (GEMSA) Long-Term Foreign Currency and Local Currency Issuer Default Ratings (IDRs) at 'CCC-'.

Fitch has also affirmed the senior unsecured notes co-issued by Central Termica Roca S.A. (CTR) and GEMSA, which are guaranteed by GEMSA at 'CCC'/'RR3'. Both issuers are jointly and severally liable for any payment obligations under the notes.

GEMSA's ratings continue to reflect its dependence on the country's offtaker and electricity market coordinator, Compania Administradora del Mercado Mayorista Electrico S.A. (CAMMESA). Fitch believes GEMSA is vulnerable to, and can little afford, payment delays from CAMMESA, given its expected tight EBITDA interest coverage for 2023.

Key Rating Drivers

High Leverage, Tight Debt Service Coverage: GEMSA's cash flow is relatively stable and predictable provided that CAMMESA continues to pay within its current timeframe of around 70 days (down from a peak of over 100 days in December 2022). As of 2Q23, 99% of the company's revenue was denominated in U.S. dollars, and approximately 89% of EBITDA was derived from long-term take-or-pay contracts under Resolutions 220/2007 and 21/2016.

On a consolidated basis, Fitch estimates GEMSA's leverage will peak at around 9.4x in 2023, and then decline thereafter to around 4.1x over the rating horizon as the company pays off maturing obligations and the Ezeiza, Maranzana, Talara, and Arroyo Seco projects are completed (note: excluding limited recourse debt, Fitch estimates leverage at 7x in 2023). EBITDA interest coverage is projected to be tight at around 1.4x in 2023, before improving to 2.0x in 2024.

EBITDA Margins to Improve Post-2023: Fitch expects GEMSA's EBITDA to increase to around USD167 million in 2024 from USD130 million in 2022. CAMMESA awarded GEMSA power purchase agreements for its Ezeiza, Maranzana, and Arroyo Seco projects, which are combined-cycle and co-generation projects under Resolution 287/2017. The imminent completion of the Talara co-generation project in Peru is estimated to generate about USD15 million in incremental EBITDA.

Completion of the Ezeiza plant expansion in late 2023 is estimated to generate about USD38 million; completion of the Maranzana plant expansion in mid-2024 is anticipated to generate an additional USD28 million of annual EBITDA, thereafter; and the final (second stage) completion of the Arroyo Seco co-generation project in January 2025 is expected to generate total incremental EBITDA of around USD24 million. GEMSA will have no further contract expirations until December 2025, when 56MW under Resolution 220 are scheduled to expire.

Refinancing Risk: GEMSA has been able to successfully repay its sizable short-term maturities in 2023 with funds from local debt issuances. But for 4Q23 and 2024, the company still faces roughly USD265 million in short-term debt and an average of USD168 million of debt will mature each year over the rated horizon. This high concentration in short-term debt coupled with elevated financing costs, deteriorating macroeconomic conditions in Argentina and capital control rules that may be extended through 2024 exposes the company and its Argentine peers to some refinancing risk.

Derivation Summary

GEMSA's rated Argentine utility peers are Pampa Energia S.A. (B-/Stable), Genneia S.A. (CCC-), AES Argentina Generacion S.A. (CCC-) and MSU Energy (CCC-). GEMSA's ratings and those of its pure-play generation peers reflect Argentina's sovereign rating, because they receive payments from the market coordinator, CAMMESA, which depends on the government. Fitch estimates median gross leverage for GEMSA's Argentine utility peers at 4.2x in 2022.

GEMSA's expected 2023 gross leverage, measured as total debt/EBITDA, is 9.4x, weaker than Pampa Energia's 1.4x, AES Argentina's 1.9x, Genneia's 4.0x and MSU Energy's 4.0x. GEMSA is undertaking a combined-cycle expansion at its Ezeiza and Maranzana plants, similar to ones MSU Energy completed in 2020, for which GEMSA incurred an additional USD130 million in debt in 2021. Genneia recently completed renewable energy expansions under the renewable energy RenovAr program and is in a deleveraging phase. GEMSA's working capital levels are vulnerable to delays in payments from CAMMESA as it increases leverage to begin its combined-cycle expansions.

Key Assumptions

Refinancing/financing assumptions based on maintenance of roughly USD100 million in readily available cash annually from 2024 through the rating horizon, and refinancing of upcoming maturities at current market rates;

COD of projects as expected: Talara YE23, Ezeiza YE23, Maranzana mid-2024, and Arroyo Seco Jan. 2025;

Capex of USD15 million annually;

Tax deferment through the rating horizon;

Aggregated contracted capacity payments of USD168.6 million annually over the rating horizon;

Average capacity factor of 55%, and average price of electricity of USD14 over the rating horizon.

Recovery Analysis

Key Recovery Rating Assumptions EBITDA declines 30% in bankruptcy; A 5.0x EBITDA multiple; Administrative claims of 0%.

RATING SENSITIVITIES

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

An upgrade of the Argentine sovereign rating;

Given the issuer's high dependence on CAMMESA subsidies from the national treasury, any further regulatory developments leading to a market less reliant on support from the Argentine government or a sovereign upgrade could positively affect the company's collections/cash flow;

Cumulative cash flow from Peru covering hard-currency debt service by 1.0x on a consistent basis.

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

A downgrade of GEMSA below 'CCC-' could occur if Fitch believes that a default of some kind is probable or a default-like process has begun. This would be represented by a 'CC' or 'C' rating, given that GEMSA's ratings are linked to those of the Argentine sovereign at 'CC', due to the high reliance on government subsidies to the electricity sector.

Liquidity and Debt Structure

Pressured but Improved Liquidity: Fitch expects the company to exhibit tight EBITDA interest coverage of 1.3x in 2023, increasing to 1.8x in 2024 and to 1.9x in 2025. As of June 30, 2023, the company had a cash balance of USD225.8 million, roughly 90% of which was held in U.S. dollars.

Issuer Profile

Generacion Mediterranea S.A. (GEMSA) is a holding company for most of Grupo Albanesi's electricity generation assets. Albanesi has been operating in the sector since 2004, and currently owns or participates in five generation companies: Generacion Mediterranea S.A., Central Termica Roca S.A., GM Operaciones S.A., Generacion Litoral S.A. and Solalban Energia S.A.

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.

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