Fitch Places Enersis & Endesa-Chile on Rating Watch Negative

Business Wire, Oct 8, 2002

Business Editors

CHICAGO--(BUSINESS WIRE)--Oct. 8, 2002

Fitch Ratings has placed the international local and foreign currency ratings of Enersis S.A. (Enersis) of 'BBB ' on Rating Watch Negative. The national scale rating of Enersis remains at 'AA-' with Rating Watch Negative. Endesa-Chile's international local and foreign currency ratings of 'BBB ' and national scale rating of 'AA' have also been placed on Rating Watch Negative. Enersis owns 60% of Endesa-Chile.

The rating action on Enersis reflects the downgrade of Endesa-Spain to 'A' with a Negative Rating Outlook coupled with reduced expectations regarding the level of Endesa-Spain's support for its Latin American investments. This change in expectations may be partially offset by the measures recently announced by Enersis and Endesa-Chile to improve its standalone credit profile, including divesting assets, reducing debt, increasing the free cash flow, and increasing equity, which will be analyzed to resolve the Rating Watch status. Equity increases at Enersis will be partially supported by Endesa-Spain, as previously anticipated, via the conversion of up to US$1.4 billion in subordinated debt from Endesa-Spain. Although Endesa-Spain's contribution will not have a cash flow benefit, fresh money could come from the other shareholders's subscription should they choose to participate. The maintenance of the intercompany loan, in its current form or as equity, plus potential asset purchases up to $150 million represents the extent of the Spanish parent's support to Enersis-a defined level of support which will be incorporated into the standalone credit quality of Enersis and Endesa-Chile following the review.

The rating pressure also reflects the weaker sovereign ratings of Colombia, Peru, and Brazil. Given current conditions in Argentina, Fitch has precluded any dividends out of Argentina in the near term. Although on a consolidated basis, Enersis will continue to include the financial results from Edesur and Endesa-Chile's Argentine subsidiaries.

The company believes that the problems in Argentina can be partially offset by improvements in Brazil, Colombia, and Peru, which combined may represent two-thirds of foreign cash flow for 2002. Fitch remains concerned about investments in Brazil given the material devaluation since the beginning of the year and concerns over the evolving regulatory environment, which could create liquidity problems for the Brazilian subsidiaries. With respect to Colombia, a recent report by Fitch's sovereign group analyzed risk of contagion from Argentina and Brazil, with Colombia being the most exposed. In the Colombian electric sector, sustained increased in demand and higher tariffs, may offset some of the contagion. In Chile, the group's operations should benefit from relatively stable prices and continued demand growth.

Enersis is the largest private electricity distribution and generation group in Latin America. The company has varying ownership interests in electric distribution companies in Argentina, Brazil, Chile, Colombia and Peru; electric generating companies in Argentina, Brazil, Chile, Colombia and Peru; and electric utility-related service companies. Enersis is 65%-owned by Endesa-Spain.

Endesa-Chile is the largest electricity generation company in Chile and owns and operates approximately 48% of the country's total generating capacity. Endesa-Chile is also involved in electric interconnection business between Argentina and Brazil. Endesa-Spain is Spain's largest electrical utility, which holds existing energy investments in South America. All three companies have direct and indirect stakes in companies located in Chile, Argentina, Colombia, Brazil, and Peru.