María Carolina Ramírez – [email protected]
The most recent news from Empresas Públicas de Medellín (EPM) on the demand for $ 9.9 billion from the partners who built Hidroituango and the massive resignation of eight of its nine board members, were enough for the risk rating agencies Moody’s and Fitch make an analysis of the situation and take into consideration the credit rating of the company.
The first to speak was Moody’s who assured in their report (see attached) that “the announcement is negative from a credit point of view, since it increases the risk of more delays and cost overruns to complete the Ituango dam, depending on how the consortium responds. “Moody’s retains EPM’s Baa3 rating, with a negative outlook.
For this firm, the decision of the lawsuit, although it is in line with the claims of a company to recover the money that had to pay more for the problems of the largest hydroelectric plant in the country, this may also affect the company if It’s up to you to find other contractors.
“A potential replacement of construction contractors would lengthen the construction period and likely increase costs, and would be detrimental to EPM’s leverage track record further exposing the company’s balance of risks. Even if successful, the process initiated by EPM it will be prolonged and probably will not provide any benefit to the company within the horizon foreseen for the dam to come online in 2022, “says the rating firm.
For his part Fitch Ratings reported in the afternoon that it lowered the issuer default ratings (in local and foreign currency of Empresas Publicas de Medellín ESP (EPM) to ‘BBB-‘ from ‘BBB’ and maintained the Negative Rating Watch. “The downgrade is due to to a greater intervention of the owner of EPM, the city of Medellín (BBB- / Negative), in the management of the company, which represents a deterioration of the corporate governance controls in the company. Fitch considers that the recent actions taken by the company are contrary to the Governance Agreement, signed on April 23, 2007, between the City of Medellín and the EPM administration, in which the municipality agreed to respect the autonomy of EPM as an industrial and commercial company of the State and to act exclusively through the board of directors. “
In addition, they reported that EPM’s Rating Watch Negative reflects the continuing uncertainty regarding the closure of the blocked Auxiliary Diversion System of Ituango since April 28, 2018, and the excessive final costs of its Ituango project.
Regarding the issue of the resignation of the company’s board of directors, Moody’s believes that “the abrupt resignation highlights the weaknesses within EPM’s corporate governance structure.”
And although both qualifiers recognize that in the decision to sue the constructors of the work it was not an obligation to consult the board of directors, so there would not be a fault in this action, “the resignation of the board exposes a fragile structure of corporate governance under 99.9% owned by the Municipality of Medellín, and the company’s highest exposure to political risks. In fact, the mayor has broad power to nominate all the remaining eight board members without major restrictions, “explained Moody’s.
Fitch believes the company remains exposed to execution risk even though it has made progress to remedy the collapse of the project’s tunnels. The latest events with EPM also led to a negative behavior in the international market for debt securities in recent days. According to data from Bloomberg, the interest rate has dropped which implies an impact for the issuer, but is also an opportunity for investors who want to buy.