Fitch Ratings has affirmed A.I. Candelaria (Spain) S.A.'s Long-Term Foreign and Local Currency Issuer Default Ratings at 'BB'.

The rating action affects USD975 million of notes outstanding due between 2028 and 2033. The Rating Outlook is Stable.

A.I.	Candelaria's ratings are linked to the credit profiles of OCENSA (BB+/Stable) and Ecopetrol S.A. (BB+/Stable), which indirectly own 72.648% of OCENSA, and is A.I. Candelaria's only source of dividends to service debt. The ratings also incorporate the significant influence of A.I. Candelaria on OCENSA's dividend policy, which lessens concerns regarding the dependence on a sole source of cash flow coming from its minority interest in OCENSA. The ratings are constrained by A.I. Candelaria's moderately high leverage and structural subordination to OCENSA's creditors.

Key Rating Drivers

Adequate Dividend Stream: A.I. Candelaria's ratings are supported by the quality of the dividends received from its 27.352% stake in OCENSA. The company participates in a regulated business with strong cash flows and a good track record of dividends received. Fitch's revised base case scenario assumes dividends from OCENSA ranging between USD175 million-USD185 million over the rating horizon. A.I. Candelaria benefits from OCENSA's key position as the largest crude oil transportation company in Colombia, which connects the most important oil basins with the country's main export terminal and refineries. This helps OCENSA to remain competitive through different price cycles.

Moderate Capital Structure: A.I. Candelaria's capital structure is moderate for its current rating. Gross leverage, as measured by total debt/dividends received, is expected to reach 5.5x as of YE 2022. Leverage is expected to gradually trend towards 4.5x in the medium-term, once the company begins the amortization of its outstanding notes in 2022. The amortized structure of A.I. Candelaria's notes reduces the company's exposure to refinancing risk. FFO is expected to cover interest expenses more than 3.0x over the rating horizon.

Structural Subordination: A.I. Candelaria's outstanding notes will remain structurally subordinated to OCENSA's USD500 million notes. A.I. Candelaria is a holding company that depends on dividends it receives from OCENSA to service its own obligations. Therefore, a substantial increase in leverage at the OCENSA level could increase the structural subordination of A.I. Candelaria's creditors. This risk is mitigated by OCENSA's track record of stable dividend distributions and A.I. Candelaria's veto right over changes in OCENSA's dividend policy and capex above USD100 million. Fitch believes the projected dividend stream would be more than sufficient to cover interest expense and principal payments resulting from the outstanding notes.

Strong Minority Rights: The shareholders' agreement gives A.I. Candelaria significant influence on OCENSA's dividend policy, which lessens the concerns regarding the dependence on a sole source of cash flow coming from its minority interest in OCENSA. A.I. Candelaria has a strong veto right on OCENSA's relevant decisions, and is entitled to appoint two of the five directors to OCENSA's board. A 90.1% majority of shareholder votes is required to change the dividend policy, among other significant business decisions to protect cash flow and liquidity.

Derivation Summary

A.I.	Candelaria's ratings rely on the dividend stream received from OCENSA, which has a non-investment grade credit quality. Overall, assets such as crude and products pipelines, natural gas and other contractually-supported operations have predictable operating performance, and consistent earnings and cash flow. OCENSA's credit profile is linked to that of Ecopetrol, which indirectly owns 72.648% of OCENSA. Fitch believes operational integration and strategic ties between the entities are important enough to create economic incentives for Ecopetrol to effectively support OCENSA.

Tolling-based natural gas peers in the region, such as Transportadora de Gas Internacional S.A. E.S.P. (TGI; BBB/Stable) and Transportadora de Gas del Peru, S.A. (TGP; BBB+/Negative), benefit from the cash flow stability afforded by more purely take-or-pay models, allowing them to support more leverage. OCENSA's stronger financial profile, with average leverage below 0.5x over the rating horizon, is offset by a greater exposure to volumetric risk, given its higher reliance on ship-and-pay contracts relative to peers.

Key Assumptions

Fitch's Key Assumptions Within Our Rating Case for the Issuer:

OCENSA's transported volumes for ship-and-pay contracts grows 1% in 2022 and 1.5% from 2023;

OCENSA's transported volumes for ship-or-pay contracts according to negotiated terms with off-takers;

Regulatory tariffs remain through 2023;

Dividend pay-out of 100%;

Exchange rate forecasted by Fitch's Sovereign Group;

Debt service reserve account covers 1.25x the next debt service payment (interest and principal);

Dividends distribution contingent on meeting the required debt service reserve account.

RATING SENSITIVITIES

Factors that could, individually or collectively, lead to positive rating action/upgrade:

An upgrade of Ocensa credit ratings.

Factors that could, individually or collectively, lead to negative rating action/downgrade:

A downgrade of OCENSA credit ratings;

Interest coverage (dividends received/gross interest) below 2.5x on a sustained basis;

A significant additional debt at OCENSA's level, which increases the structural subordination of A.I. Candelaria;

The failure to deleverage below 4.5x over the rating horizon, which could widen the rating differential with OCENSA.

Best/Worst Case Rating Scenario

International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.

Liquidity and Debt Structure

Liquidity Not a Concern: A.I. Candelaria has no liquidity issues. Liquidity is expected to be strong, considering the company's forecast for readily available cash and consistently positive FCF generation. The principal of the notes due 2028 will be payable in 12 consecutive semi-annual instalments beginning in 2022, equivalent to 70% of the issuance. The notes due 2033 will be payable in 10 consecutive semi-annual instalments beginning in 2028, equivalent to 75% of the issuance. The balance will be paid on the maturity dates. The debt service reserve account to be constituted as part of the collateral will represent a liquidity buffer over the medium term which must cover no less than 1.25x of the next debt service payment (interest and principal).

Issuer Profile

AI Candelaria (Spain S.A.) is a holding company whose main source of cash is the dividends received from its 27.352% ownership interest in Oleoducto Central S.A. (OCENSA), the largest crude oil transportation company in Colombia.

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

Public Ratings with Credit Linkage to other ratings

A.I.	Candelaria's ratings are linked to OCENSA's credit profile.

ESG Considerations

Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg.

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