AES Corp. has an ambitious plan in the works to obtain a new $1.6 billion secured credit facility and exchange $500 million in notes, which would basically push all of its maturing debt, including notes due this year, to 2005. However, the announcement did not sit well with investors or credit ratings agencies, and by the end of the week, the Arlington, VA-based utility had suffered two credit downgrades and another sharp drop in its share price.

The secured loans would replace several that are maturing next year, including an $850 million revolving facility maturing in March 2003; a $425 million term loan maturing in August 2003; a $262.5 million term loan to an AES subsidiary maturing in July 2003; and a 52.3 million pound (US$82.1 million) letter of credit facility.

Two exchange offers also are part of the financing plan. One would be for $300 million of 8.75% senior notes maturing this year. Half of these exchange notes would be for cash and half would be for new 10% senior secured notes that would mature in 2005. The second exchange offer is being made on the new 10% senior secured notes for $200 million of 7.375% Remarkable and Redeemable Securities (ROARS). These would mature in 2013, and holders of those secured notes at 7.375% would have the right to sell them back to AES in 2003, according to the company. Both exchange offers will expire Nov. 8.

Following the news Thursday morning, investors responded well, pushing the meager stock up more than 20% by midday. Unfortunately, it was all downhill after that. AES had closed at $2.57 on Wednesday, but by Thursday’s close, it stood at $2.09, and by Friday afternoon, shares were trading around $1.80.

The news also did not sit well with Standard & Poor’s Ratings Service (S&P), which cut the company’s corporate credit and senior unsecured debt ratings to “B+” from “BB-“; subordinated debt to “B-” from “B”; and trust preferred securities to “CCC+” from “B-.” The ratings also were placed on CreditWatch with negative implications. It also reduced the ratings for subsidiaries IPALCO and Indianapolis Power & Light Co. (IPL) because of their “rating linkage” to AES.

“If AES cannot execute asset sales, its solvency could be threatened,” said S&P analyst Scott Taylor. “If and as such a plan is executed and if market access improves, the negative outlook would be lifted, and as debt is paid down, the rating would move up consummately assuming AES’s current cash flow profile is maintained.”

Taylor said Thursday that with a successful transaction, AES’s flexibility would be increased “by pushing off any substantial maturities for up to three years. “However, the downgrade reflects continued deterioration in AES’s Latin American businesses, and anticipation that cost cutting and improved performance at other businesses will not make up for those losses to the extent that AES had projected in its guidance provided after the second quarter.”

If the tender is successful, he said, AES will not be paying down maturities out of operating cash flow as they come due, as had been AES’ plan, but rather will be paying down debt as proceeds from asset sales are realized, ” which will likely result in less timely de-leveraging than had been anticipated.”

The S&P analyst noted that many of AES’s businesses “provide solid, stable cash flow, with 44% of anticipated 2002 distributions coming from contract generation or large utilities in North America, and about one-third of anticipated distributions going forward coming from these assets. The remainder comes from a diversified mix of global businesses that include utilities, distribution companies, contract generation, and merchant generation.”

However, he said, “AES’s concentration in Latin America has hurt its financial performance over the past two years. That, combined with general market conditions in the sector, has severely restricted AES’ access to capital and placed it in a position where it needs to sell assets to reduce leverage to a more manageable level.” If AES were to fail, Taylor said its ratings would fall to “B” or further, depending on the circumstances. “AES would then need to repay the December maturity, close on its bank facility, and begin to execute its asset sale program to maintain its solvency.”

S&P will be completing a detailed analysis and assign a rating to the bank facility and exchange notes in the next few days, focusing on “the strength of the security package and recovery prospects for the holders in a bankruptcy scenario. Depending on Standard & Poor’s views on potential recovery, the notes will be rated either at the corporate credit rating of AES or one to two notches higher.”

Meanwhile, even though it considers the proposed transactions a “positive step,” Fitch Ratings also dropped the AES ratings to “B” from “BB-“; lowered its senior subordinated notes to “B-” from “B”; convertible junior debentures and trust securities to “CCC+” from B-“; did not change the “B-” rating on senior and junior subordinated notes; and kept it at Rating Watch Negative. Fitch also lowered the ratings of IPALCO, but left unchanged the ratings of IP&L. The ratings of CILCORP and Central Illinois Light Company (CILCO) remain unchanged and on Rating Watch Evolving pending completion of their committed sale to Ameren Corp.

If the bank refinancing and exchange offer are successful, “Fitch expects to rate the senior secured bank facility and the senior notes ‘BB-‘ and remove the Negative Rating Watch. The Rating Outlook would then be Stable on the senior notes and bank facility. On the other hand, if these transactions fail, the newly assigned ‘B’ senior unsecured rating may be further reduced to reflect the company’s imminent liquidity crisis and refinancing risk.”

Fitch added that “In the next two years, relieved from the burden of heavy debt maturities, the company plans to pay down the restructured debt using excess parent operating cash flow and proceeds from more asset sales. Barring any further unforeseen deterioration in AES’ businesses worldwide, the company’s credit metrics are expected to stabilize and see potential for improvement in late 2003/early 2004.”

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