OREANDA-NEWS. S&P Global Ratings affirmed its 'BBB–' ratings on Empresa Nacional del Petroleo (ENAP). We also kept the company's 'b' SACP unchanged. At the same time, we assigned our 'BBB-' rating to the company's proposed 10-year senior unsecured notes for up to $700 million. The outlook remains stable.

On Aug. 2, 2016, ENAP announced that it intends to issue 10-year bullet dollar-denominated senior unsecured notes for refinancing purposes. The use of proceeds includes the tender of a portion of its existing bonds due 2019, 2020, and 2021 above par and the payment of all costs associated to the transaction. We view the voluntary tender offer as opportunistic.

Our new base-case scenario, which includes the new issuance, assumes that ENAP will maintain relatively stable debt levels and credit metrics and in line with our previous expectations. Moreover, we believe that a successful transaction will improve the company's maturity schedule by reducing the share of its medium-term debt, which accounted for approximately 50% of total consolidated leverage as of March 31, 2016, and by extending its weighted average maturity beyond the 5.5-year period.

The ratings on ENAP continue to reflect our opinion that there's a very high likelihood that its owner, the Republic of Chile (foreign currency: AA-/Stable/A-1+; local currency: AA/Stable/A-1+) would provide timely and sufficient extraordinary support to the company in the event of financial distress. The stable outlook on ENAP assumes that we don't expect changes in government's potential extraordinary support to the company, which is currently very high, in a distress scenario. It also considers our expectation that ENAP will continue to play a very important role in Chile's energy policy as the leading refiner in the country. We don't expect any changes in its very strong link with the government, which reflects its current ownership structure and the degree of the government's participation in operating and financial decisions. The outlook further reflects our belief that, despite higher investment and consequently higher debt, the company will maintain EBITDA interest coverage at or above 3.0x in the next two years.

A downgrade is possible if the company's liquidity deteriorates, stemming from a significant deficit projected for a 12-month horizon. This could occur if projects require substantially higher funds or if weaker spreads reduce cash flow generation. Under that scenario, we could revise our liquidity assessment to weak, which would result in an SACP of no higher than 'b-' and a downgrade to 'BB+', provided that the sovereign's rating remains at the current level. In addition, if we revise our view of the likelihood of government support to high from very high, we could also downgrade ENAP to 'BB', assuming that its SACP remains at 'b'. That could occur, for example, if our view of the company's link with the government weakens. Finally, an SACP below 'b' would also trigger a downgrade of the company to speculative grade, even if the likelihood of support remains unchanged.

Given the higher capital investment over the near term, we view a higher rating as unlikely. In any event, a higher rating would require debt to EBITDA to remain at less than 5x and FFO to debt to surpass 12%, which would result in a revision of our financial risk profile to aggressive from highly leveraged and thus a revision of its SACP to 'bb-'. This could occur if EBITDA increases significantly above our base-case projections or if the government injects capital in the company in excess of the $400 million, which would help boost main credit metrics. In addition, we could upgrade ENAP if our view of the likelihood of extraordinary support improves--for example, if we believe that its role has become critical or if its link to the government strengthens to integral.