EM LATAM CREDIT: Energuate: New Issue Fair Value
(EGUATE; Ba2/NR/BBpos)
" NEW DEAL: ENERGUATE TRUST $600M WNG 10NC5 HIGH 6% AREA– Bbg"
IPTs 10NC5Y: High 6% Area
FV 10NC5Y: 6.50% Area
• The largest electricity distribution company in Guatemala mandated investor calls that may lead to a new USD 144a/REGS benchmark-sized 10NC5-Year senior unsecured note issuance. Use of proceeds will be to refinance liabilities including the redemption of USD330mn 2027 notes.
• Energuate is highly dependent on the Guatemalan economy and government. The company received 12% of revenue as a subsidy from the government for electricity distribution to low usage, low income and rural households and is the country’s largest electricity distributor so it should trade at a spread to the sovereign.
• The credit profile is stable with reliable cash flows coming from cost and capex-based electricity tariffs that help to maintain margins plus leverage is also reasonable at 3.2x according to Fitch so the spread to the sovereign should resemble what we see in other countries with implicitly supported entities and a stable credit profile.
• We can look to ELENOR 36s as a spread to Panama 36s for electricity distributor price risk in Central America at 50bp as well as look to Mexico government-owned CFE (CFELEC; Baa2neg/BBB/BBB-) 35s relative to MEX 35s where we observe a 50bp spread to the sovereign. In Chile we see regulated public electric utility Colbun (COLBUN; Baa2/BBB/BBB+) that recently issued 2035 notes which are quoted 49bp spread to the Chile (CHILE; A2/A/A-) sovereign.
• The Guatemala (GUATEM; Ba1/BB+/BBpos) sovereign has 2036 amortizing notes, 9.74-year WAL, quoted g-spread T+166bp. Factoring in that the new Energuate issue will be callable in 5 years we assume a typical high yield call structure,103 call in 5-years followed by declining call prices until 2033 at 100 leads to a 15bp OAS value. We also account for the longer tenor and some new issue premium to derive our fair value estimate.
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