Moody’s Investors Service on Thursday downgraded the debt of AES Corp., citing concerns about smaller future dividends from subsidiaries, weaker power prices and “deteriorating conditions” in international markets were the company holds substantial generation interests. The downgrade affects about $20 billion of debt securities, and Moody’s warned that AES will remain on review for another possible downgrade.

The senior unsecured debt was downgraded to “Ba3” from “Ba1;” senior and junior subordinated debt to “B2;” and preferred stock to “Caa1.” Moody’s, which has been reviewing AES’s debt since February, also assigned a “Ba3” senior implied rating. Earlier this month, Standard & Poor’s also knocked down its rating of AES, citing the Latin American turmoil and liquidity concerns. Fitch Ratings downgraded the company last week as well (see Power Market Today, June 7).

“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,” it said. “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.”

The credit ratings agency said its continuing review would 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.”

Noting that AES had recently appointed a new CEO, Moody’s said Paul T. Hanrahan “appears to have a strong commitment to a debt reduction strategy” (see Power Market Today, June 19 ). Moody’s also noted that “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.” However, Moody’s noted that it would be difficult for AES to achieve all of its goals in the near-term.

“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.”

AES has already announced agreements to sell Cilco and AES NewEnergy, and Moody’s said the proceeds from these 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.”

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