Moody's Investors Service has downgraded a bond associated with a Peruvian gas-fired project by one notch to Ba1, the highest non-investment grade rating, in light of low spot prices and weak demand in the country.

The rating relates to a $340 million 10-year senior unsecured bond issued in 2017 to refinance the 570 MW Fenix Power Peru gas-fired project in Chilca, Peru (PFR, 9/12/17).

Spot prices in the country have languished below $10/MWh as a result of an imbalance in supply and demand in the power market, according to Moody's, which notes that Peru's reserve margin reached 54% last year.

"Despite carrying a high contracted load in the short to medium run, Fenix is not immune to volume risks as Peruvian power purchase agreements (PPA) do not completely mitigate demand volatility," wrote the rating agency's analysts in a report on April 26. "As a result of the abovementioned dynamics, Fenix significantly underperformed financially in 2018."

The plant is jointly owned by Colbun (51%), the Abu Dhabi Investment Authority (36%) and investment fund Sigma Safi (13%), and the minority shareholders recently signed a cash support agreement to provide comfort to bondholders. Under the agreement, Colbun is obliged to lend up to $101 million to the project company through April 2022 if required to service the debt, while the minority co-owners would also lend funds on a subordinated basis.

"While we view the agreement as a strong indicator of support, our credit view recognizes the limitations in term and amount, as well as the inability of creditors to directly enforce Colbun's obligation on a timely basis to avoid a payment default," reads the Moody's report.

The bonds still have investment grade ratings from S&P Global Ratings and Fitch Ratings.

S&P affirmed its BBB- rating in February, noting that Colbun would be likely to support Fenix "under almost any foreseeable circumstances" because of its importance to the parent company's growth strategy in Latin America and because of cross-default clauses in their debt documents.

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