Moody’s affirms PSALM rating, outlook

MOODY’s Investors Service has affirmed the long-term debt rating of Power Sector Assets and Liabilities Management Corp. (PSALM), citing its strategic importance as a state-led entity that carries out a mandated role for the country’s power sector.

In rating action dated March 22, Moody’s also maintained its “stable” outlook on PSALM, which it expects to continue receiving strong support from the government. A stable outlook means that the grade can be retained over the next 12 to 18 months.

“PSALM’s credit profile is underpinned by its strategic importance as a state-owned enterprise that carries out a mandated policy role for the Philippine power sector,” Moody’s Vice President and Senior Analyst Spencer Ng was quoted as saying.

“Supporting the ratings is the Government of Philippines’ (Baa2 stable) strong commitment to the company, which underpins the very high likelihood of support for PSALM, to prevent a default in times of stress,” Mr. Ng added.

In its rating action, Moody’s noted that PSALM’s financial position and liquidity were “heavily influenced” by the government, as seen from the presence of government officials in the company’s board of directors, and the entity’s reliance on funding from the Malampaya-gas-to-power project fund under the Murang Kuryente Act (MKA).

The MKA, which was signed two years ago, allocates P208 billion from the Malampaya project’s fund to PSALM over the next three or four years. In return, PSALM will not collect new tariffs to pay for future stranded costs and stranded debts until the allocation is used up.

While the MKA provides more details on how PSALM will be reimbursed for stranded costs, it will also increase PSALM’s dependence on the government, Moody’s said.

“If annual funding allocated under the MKA falls short of the requirement, PSALM might need to raise additional debt to meet its operating requirements,” Moody’s said.

It added that it expects the Philippine government to continue to support the company’s funding requirements, as the former has “unconditionally and irrevocably” guaranteed all of PSALM’s outstanding external debt and has provided loans to the firm.

“In Moody’s view, PSALM’s close financial and operational links with the government make its credit profile inseparable from the government’s own credit profile. As such, PSALM’s rating is derived solely based on support and is assigned without a baseline credit assessment,” it said.

Moody’s said that PSALM’s ratings can be upgraded if the country’s sovereign rating is also upgraded.

The state-led company’s ratings can also be downgraded if the Philippines’ sovereign experiences the same, Moody’s said. A rating downgrade can also happen “if evidence emerges of a weakening in government support for PSALM or any change in PSALM’s policy role.”

PSALM is in charge of privatizing the country’s power assets to settle maturing obligations assumed from the National Power Corporation.

Two months ago, PSALM said that it was able to reduce its principal financial obligations by 9.5% by end-2020 compared with the level at the start of the year. It added that it had paid all interests and borrowing costs that matured last year totaling P11.56 billion. — Angelica Y. Yang