First Gen gets top rating for P5-billion bond issue

MANILA, Philippines - First Gen Corp., the power generation unit of the Lopez Group, has received a credit rating upgrade from Philippine Rating Services Corp. for its outstanding P5-billion bond issue.

The rating was changed from PRS A plus to PRS Aa, an improvement of two notches.

Obligations rated ‘PRS Aa’ are of high quality and are subject to very low credit risk. The obligor’s capacity to meet its financial commitment on the obligation is very strong, PhilRatings said.

The bonds will mature on July 30, 2010 and will be paid using a portion of the proceeds from First Gen’s P15-billion stock rights offering concluded in January 2010.

PhilRatings’ review are based on available information and projections at the time it is ongoing. In arriving at the rating, PhilRatings considered that the short-term liquidity issues of First Gen have already been addressed and that there is an outlook of improving profitability over the long-term.

Over the past year, First Gen has been able to rationalize the significant amount of short-term borrowings it took on in relation to the acquisition of Energy Development Corp. (EDC). This was done through a mixture of issuance of long-term debt, refinancing of short-term debt into longer term debt, dividends from subsidiaries and partial disposition of its interest in FG Hydro.

“Although liquidity issues have been addressed to date, cash flow, specifically cash dividends to be received from major subsidiaries and associates may remain limited in the short-term. Major subsidiaries FGPC and FGP/Unified Holdings Corp.’s ability to pay out dividends will still be affected by substantial interest expense (due to increased debt level) and the expiration of income tax holiday in recent years,” PhilRatings said.

PhilRatings also noted that the dividends to be received from EDC would still have to be used to service the debt of its intermediate holding company, Prime Terracota/Red Vulcan. 

“The lower debt level of First Gen, at present, is seen to improve its profitability over the long term,” PhilRatings said.

First Gen’s profitability was previously weighed down by the significant amount of interest expense brought about by additional debt obtained to acquire a 40 percent economic interest in EDC.

The company, however, has already paid P7.8 billion worth of debt and will further reduce its debt by another P5 billion using the proceeds of the P15-billion stock rights offering. In addition, its bottom line will also benefit from the improved performance of EDC following the enactment of the Renewable Energy Law.

Profitability is also seen to benefit from the tight power supply situation in the country which is expected to improve the demand and pricing for the company’s uncontracted capacity.

PhilRatings said it shall continuously monitor developments relating to First Gen and may change the rating at any time, should circumstances warrant a change.