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Latin American Power
NOTICE: This information is intended only for investors who have sufficient knowledge of English to understand the Prospectus and other information relating to the Notes. The minimum equivalent is $125,000
Key facts
Bonds secured by new wind power plants
Yield to maturity 20%
Lifetime of power plants 2.29 times longer than bond maturity
A solvable situation that put bonds under pressure
Potential to 69.7% in 6-12 months
About company
Latin America Power is the company that owns 10 projects in Chile and Peru with a total capacity of 340 MW. In Peru it is mainly about hydroelectric power stations and in Chile it is mainly about wind power stations. Through subsidiary company Inversiones Latin America Power were bonds with a volume of 404 million successfully subscribed for an interest rate of 5.25% p.a., when Chilean government bonds of similar maturity at the . Time carried 2.5% to maturity., the bonds were rated BB+ (one grade from investment grade)
Economy
All funds were used to refinance the existing financing, as both projects are running, the development risk was eliminated, and thus it was possible to provide pledge and obtain a very good interest. Bonds are amortized, i.e. that the company pays out the coupon but also part of the principal with each payment. The bonds are secured by two wind farms, the wind farms are newly fitted with turbines from Vestas
These two wind farms are
Why are bonds trading at stressed prices?
Chile is an ideal country for a boom in renewable resources, even in the future the country should become a strong exporter of liquefied (green) hydrogen, but for that it needs a lot of emission-free energy. There is a fairly solid boom in the country, especially in the northern desert, but at this moment it has become a problem, because the installation of new power has been overtaken by the infrastructure, so the company is now in a curious situation. Due to the insufficient capacity of the network, it is not able to transport electricity to populated areas, even to meet its obligations it has to buy it from diesel power plants that have the transmission capacity to get it to populated areas to end customers
What is the outlook?
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At the end of the year, two smaller portable systems should arrive, which would improve the situation
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In addition, the price of oil and diesel on the world exchanges is falling quite significantly and this brings relief
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The controlling shareholder provided the company with a $5 million subordinated loan to meet its obligations to creditors in July this year
Assets vs. liabilities
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The company decrease the value of power station every year and after amortization the turbines are valued at USD 362 million, confirmed by an EY audit
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384 million bonds remain to be paid, but now they are trading at 56% of their value, i.e. it is possible to buy the entire debt for 215 million USD
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Basically, even when converting debt to shares (equity), we buy sectors worth USD 362 million for USD 215 million
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The company generated an average EBITDA of USD 33 million in 2020-2017, see Prospectus
Possible scenarios
Target scenario: 69.7% in 6-12 months
Neutral scenario: Annual coupon 9% p.a. from the invested amount until the situation definitely improves.
Negative scenario: Materialization of other risk factors and further decline in the value of bonds. In an extreme scenario, we expect the entire secured debt to be converted into shares. The company is able to pay an average of $25 million a year in financing costs in normal years, which would practically be eliminated and these funds could be paid out in the form of dividends. Which in normal years would exceed approximately 11.6% of our investment from this component alone.
*Upozornění: Prognózy nejsou spolehlivým ukazatelem budoucí výkonnosti a reálný výsledek se od prognóz může lišit.
*Od hrubé výkonnosti je třeba odečíst poplatky a odměny s investicí související, ty naleznete v investičních cenících služeb.
*Negativní scénář: zhmotnění se rizika, která aktuálně nejsou známa a může i přes všechny předpoklady dojít ke ztrátě investovaných prostředků.
Conculusion
With the above information in mind, we believe that the company will deal with the problems. These are problems that should be temporary and do not change the long-term investment thesis under which these wind farms were built and financed. There is also the willingness of the main shareholder to provide temporary liquidity until the situation in the transmission system is resolved. That should come soon, at the end of this year.
Companies also have options, such as extending maturities or partially exchanging bonds for shares, etc.
When this situation is resolved, we expect the price of the bonds to return to 90% of their nominal value, which is +60.7%. When buying at these prices, only an annual coupon of approx. 9% p.a.
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Vestas Winds guarantees that the turbines will work 98% of the time, San Juan has this contract until 2037, the smaller Totoral until 2029. Subsequently, these contracts will be renegotiated.
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Both farms count on a life extension program for 30 years. 70% of production is under long-term, fixed, inflation-linked contracts, which means a high degree of predictability of management. But it is also now causing financial pain, due to the inability to transfer the produced energy to the customer. This problem should go away soon.
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Fitch states that the refinancing risk is mitigated by the project life coverage ratio (PLCR) indicator of 2.29, meaning that the estimated lifetime of the power plants is 2.29 times higher than the maturity of the bonds.