S&P assigns 'BB' rating to PSALM dollar notes issue

MANILA, Philippines – Standard & Poor’s (S&P) has assigned a “BB” rating to the proposed dollar notes issue of the Power Sector Assets and Liabilities Management Corp. (PSALM), saying that weak electricity demand could affect the company’s performance.

Also yesterday, Moody’s Investor Service assigned a “B1” rating to PSALM, based on the irrevocable and unconditional guarantee by the government. Its rating outlook is positive, in line with the sovereign outlook.

Moody’s said this was the first time that it has assigned a rating to PSALM.

“PSALM performs a crucial role as mandated by law to deregulate the Philippine electricity industry to a competitive and market-driven sector,” says Jennifer Wong, a Moody’s AVP/analyst.

“As such, the Philippine government views PSALM as strategically important to restructure and reform the country’s electricity industry,” Wong said. “Furthermore, the government views PSALM as an extension of itself as all debt issued by PSALM are unconditionally and irrevocably guaranteed by the government.”

As such, Moody’s said a debt default by PSALM would trigger a cross default on government debt as stated in the government’s debt covenants.

S&P also said that its rating for PSALM’s issuance factored in strong government support which was, however, offset by the company’s weak stand-alone financial risk profile.

According to S&P, PSALM essentially reflected the weak credit profile of the National Power Corp. (Napocor), its exposure to exchange rate fluctuations, and the uncertain regulatory environment.

“These, along with the weak economic outlook, may hamper the fund-raising capacity of private players interested in bidding for Napocor’s assets, thereby delaying the privatization process,” S&P said.

Moreover, S&P said the economic slowdown might also affect electricity demand, especially from the industrial sector, which accounted for one-third of total electricity sales.

PSALM’s plan to issue the notes is intended to raise funds that would be used for general corporate funding requirements, including servicing payments arising under contracts with independent power producers (IPPs).

S&P said the issue rating underscores the   government’s (foreign currency BB-/Stable/B; local currency BB+/Stable/B) irrevocable, unconditional, and timely guarantee on the notes.

“Standard & Poor’s believes the likelihood of extraordinary government support for PSALM to be extremely high, due to the company’s critical importance and integral link to the government,” S&P said.