Argentine gencos face unsustainable electric subsidies, refinancing risks

PRESS RELEASE from Fitch Ratings
18 de octubre de 2022

Fitch Ratings-Santiago/Austin/New York-18 October 2022: Argentine electric generation companies (gencos) rely on government subsidies at unsustainable levels and will face increasing refinancing risks over time, according to a new Fitch Ratings report.

“The marginal cost of thermoelectric power generation in Argentina is low compared with peers as gencos do not need to procure fuel,” said Julie Garcia Seebach, Director. “Both contracted and uncontracted gencos are exposed to the main off-taker, CAMMESA, which is subsidized by the Argentine sovereign. Most gencos are dependent on payments from CAMMESA.”

Around 77% of the 2021 electricity system cost was subsidized, which Fitch expects to increase to over 80% in 2022 as electricity demand and fuel costs rise. End-user tariffs will need to be adjusted by more than the planned 40% in Argentine pesos in 2022 for the system to be self-sustaining, especially given the sovereign’s persistent weakness in debt repayment capacity and foreign currency liquidity constraints.

Genco exposure to Argentina’s current capital controls is largely manageable as maturities are long dated. Extension of the current capital controls could increase exposure over the long term. Excluding debt with multilateral creditors, current capital controls restrict FX market access to 40% of debt maturities through 2022.

GEMSA, Genneia, and Pampa were able to work within the central bank’s restrictions to refinance smaller maturities in 2022 and 2023. Capital controls should remain in place for the foreseeable future.

Interest cost is the highest single cost of total cost of production. On average, in 2021, 31% of the total cost of production was interest expense. Interest costs affect total costs because of gencos’ high borrowing costs due to a higher risk operating environment and exposure to payments from CAMMESA, not from levered capital structures.

The full report titled “Argentine Electric Generation Companies — Peer Review” is available at www.fitchratings.com or by clicking the link above.