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AES Corp 6.75% Preferred C

By Roger Conrad on January 2, 2010

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Two months ago, China Investment Corp (CIC) paid $1.58 billion for a 15 percent equity stake in AES Corp (NYSE: AES). China’s largest sovereign wealth fund–essentially a pool of excess currency reserves invested on behalf of the government–also signed a letter of intent to buy 35 percent of AES’ wind business for $571 million.

Described by management as a “game-changer,” CIC’s cash will fund AES’ estimated $4 billion project pipeline, including 6,600 megawatts of wind generation currently in development. It will also ease the company’s expansion in China and elsewhere around the world.

New construction accounted for the lion’s share of AES’ 29 percent third-quarter operating cash flow growth, a rate CIC’s connections will help sustain.

For owners of the Income Portfolio’s AES Corp 6.75 Percent Preferred C (NYSE: AES C), the deal also means less debt on AES’ balance sheet.

In fact, coupled with free cash flow and available liquidity, there’s now potential to slash recourse debt by $1 billion to $1.5 billion in 2010. That means more security for the quarterly distribution of 84.3875 cents a share.

Each preferred share is convertible to 1.4216 common shares of AES at the holder’s option. A decade ago, when the business was less valuable than it is now, AES sold for nearly six times its current price, and the preferred traded above $100.

That’s a long way from the current conversion value of less than $20. But with the 7.5 percent yield secure, there’s little risk to waiting for it.

Buy AES Corp 6.75 Percent Preferred C below its call price of $50.

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