by Santiago del Carril
Latin America Power (ILAP) faces a difficult path to monetize its receivables from Chile’s electricity stabilization funds before a USD 15m bond coupon payment due 3 July, according to a source close to the company and Martin Arancet, an analyst at Balanz Capital.
The Chilean generation company is low on cash and may not have sufficient funds to make the coupon payment if it can’t monetize part of the USD 28m in receivables owed by the Chilean government under its two electricity stabilization funds, PEC 1 and PEC 2, according to both sources.
ILAP initially expected to receive USD 10.2m from PEC 2 in 1H23, and at least part of the USD 18m receivables due from PEC 1, to help pay for the coupon payment, according to the company’s 4Q22 earnings presentation.
However, ILAP now expects to receive only USD 5m from its PEC 2 receivables, via a facility provided by the Interamerican Development Bank (IDB), while it seeks bondholder consent and a buyer for the monetization of a part of its USD 18m in PEC 1 receivables before the July coupon payment, according to Arancet and a source close to the government.
If ILAP can monetize the USD 18m PEC 1 receivables, it would likely involve a 30% haircut, meaning the company would receive USD 12m, Arancet told Debtwire.
The Chilean government issued a decree on 14 April that paved the way for a mechanism to allow the country’s energy generators to collect receivables from the government’s electricity tariff stabilization fund, as reported. However, the finance ministry still must issue a decree that guarantees the certificates of payments.
The guarantee decree will allow for the execution of the PEC 2 transaction at the end of May, according to the source close to the company. However, it is not clear how fast the government will move to issue the guarantee decree so the USD 5m can be monetized before July, Arancet said.
The guarantee decree allows the government to collateralize the certificates of payments for the IDB facility, necessary for monetizing the receivables.
ILAP depends on these receivables, as its cash flow was lower than expected in 1Q23, due to high marginal costs and low energy generation, the source close to the company said.
ILAP’s EBITDA reached USD 9.1m for 4Q22, compared to USD 4.2m in 3Q22. It booked USD 23m in revenue in 4Q22, compared to USD 17.6m in 3Q22. Results for 1Q23 have yet to be released.
Arid weather in 1Q23 affected hydrological conditions, which prevented ILAP’s hydroelectric plants from operating at total capacity, the source close to the company said. At the same time, marginal costs of fossil fuels in Chile that generators use continue to be high, and are not expected to decline until a few months, this source said.
“ILAP is ending the quarter with almost no cash and doesn’t have good generation levels,” Arancet said. “ILAP likely will be short of the necessary amount needed to pay the coupon if it isn’t able to monetize the receivables and may need more time to liquidate them before the coupon is due.”
However, a part of the PEC 2 funds could be available by the end of June, according to Arancet.
“We are in a wait-and-see approach,” Arancet said. “If ILAP doesn’t make this July payment, it will be negative for the bonds. But we calculate that the price the bonds are at now is close to the recovery value. So, I don’t think the bonds will fall by much more.”
The USD 391m 5.125% 2033 bond traded at 44.9 on 16 May, according to MarketAxess.
ILAP’s default is “probable” given the time frame of the monetization of PEC 1 and PEC II receivables in the next two months to comply with its obligations, Fitch Ratings wrote when making a downgrade on 26 April. S&P took a similar action on 21 April.
A representative from ILAP declined to comment on the matter.
