CZP.PR.A, CZP.PR.B: DBRS Warns of Possible 3-Notch Downgrade

DBRS has announced:

On June 21, 2011, DBRS maintained Capital Power Income L.P.’s (CPILP or the Partnership) ratings Under Review with Negative Implications, pending a full review of the acquisition of CPILP by Atlantic Power Corporation (ATP, not rated by DBRS) (the Transaction). Upon further assessment, DBRS is now of the opinion that, if it closes as currently anticipated, the Transaction is expected to result in a downgrade of CPILP’s ratings to non-investment-grade category. DBRS expects to assign an Issuer Rating of BB to CPILP, a security rating of BB to CPILP’s Senior Unsecured & Medium Term Notes, and a recovery rating of RR4 (indicating an expected recovery of 30% to 50%) on the Senior Unsecured Debt & Medium-Term Notes, currently rated BBB (high). DBRS would also potentially downgrade the Cumulative Preferred Shares of CPILP’s affiliate, CPI Preferred Equity Ltd., to Pfd-4 from Pfd-3. The rating actions would result in the assignment of Stable trends.

In June 2011, DBRS had assumed, based on publicly available information on ATP and on the proposed financing of the Transaction, that the ratings of CPILP would be downgraded yet remain investment-grade. However, further review of the details of the Transaction, forecast financial profile, complex financial structure and subordination implications of the combined entity warrant a non-investment-grade rating. Post-acquisition benefits such as an increase in the average power purchase agreement (PPA) term, asset base and market capitalization, as well as greater diversification of fuel source, geography and counterparty risk, are offset by combined credit metrics that are weaker than initially anticipated. Also, an October 2011 equity offering by ATP that was moderately less than expected should result in modestly higher total debt.

Pursuant to the proposed ATP bond offering, CPILP and various subsidiaries are expected to provide guarantees that were not previously contemplated:

(1) CPILP will be guaranteeing ATP’s new $300 million secured credit facility.

(2) CPILP will be guaranteeing ATP’s intended $460 million senior unsecured bond issuance. The guarantees of the intended ATP bonds will be senior unsecured obligations of the respective guarantors and will rank equally in right of payment with all of the guarantors existing and future senior debt of the guarantor and will be effectively subordinated in right of payment to all secured debt of each guarantor.

(3) Only CPILP’s C$210 million bonds will receive a senior unsecured guarantee from ATP (with the guarantee being an obligation of ATP and subordinate to its secured $300 million credit facility). The US$415 million of CPILP subsidiary bonds (in three separate issues of US$150 million, US$75 million and US$190 million) will receive no guarantee from ATP.

DBRS expects that a final review of CPILP’s ratings will follow shortly after the November 1, 2011, shareholder vote and a full review of the final guarantee documentation to be provided by ATP.

S&P placed these issues on Watch-Negative in June, as discussed on PrefBlog. They have not made any announcements since.

Update, 2011-10-24:S&P gives Atlantic Power BB- rating:

  • Atlantic Power Corp. has executed a definitive Plan of Arrangement to
    acquire Capital Power Income L.P. (CPILP; BBB/Watch Negative), a Canada-based publicly traded limited partnership with a C$1.1 billion market cap.
  • Pro forma for the acquisition, we have assigned our ‘BB-‘ preliminary long-term corporate credit rating to Atlantic Power.
  • At the same time, we assigned our preliminary issue rating of ‘BB-‘ to Atlantic Power’s $460 million senior unsecured notes due in 2018. We also
    assigned our ‘4’ preliminary recovery rating to the notes, indicating our expectation for average (30%-50%) recovery if a payment default occurs.
  • The outlook on the ratings is stable.

Update, 2011-10-26: According to the proxy material, Atlantic Power will guarantee the preferred dividends:

9.3 Restriction on Dividends
The Guarantor hereby covenants and agrees that if and for so long as either the board of directors of the Corporation has failed to declare, or the Corporation has failed to pay, dividends on the Series 1 Shares, in each case, in accordance with the share conditions attaching thereto, then the Guarantor shall not declare or pay any dividends on its shares or make any distributions or pay any dividends on securities of any successor entity of the Guarantor.

They will continue to be guaranteed by Capital Power Income LP:

On the CPILP record date, CPI Preferred Equity Ltd. has issued 5,000,000 Series 1 Shares, 4,000,000 Series 2 Shares and no Series 3 Shares. The Series 1 Shares trade on the TSX under the symbol CZP.PR.A and the Series 2 Shares trade on the TSX under the symbol CZP.PR.B. CPILP has agreed to fully and unconditionally guarantee the Series 1 Shares, Series 2 Shares and Series 3 Shares on a subordinated basis as to: (i) payment of dividends, as and when declared; (ii) payment of amounts due on redemption; and (iii) payment of amounts due on liquidation, dissolution or winding up of CPI Preferred Equity Ltd. If, and for so long as, the declaration or payment of dividends on the Series 1 Shares, Series 2 Shares or Series 3 Shares is in arrears, CPILP will not make any distributions on the CPILP units. See ‘‘Capital Structure—Preferred Shares of CPEL’’ included in CPILP’s Annual Information Form dated March 11, 2011, which is delivered with, and/or incorporated by reference into, this joint proxy statement.

The Series 1 Shares and Series 2 Shares will remain outstanding following completion of the Plan of Arrangement in accordance with their terms. CPILP will continue to guarantee the Series 1 Shares, Series 2 Shares and Series 3 Shares on the same terms and conditions as described above and Atlantic Power will provide substantially similar guarantees in the forms attached as Schedule J to the Arrangement Agreement.

However, Atlantic Power’s guarantee isn’t worth a lot since it’s not investment-grade, and the value of CPILP’s guarantee has been diminished since it will now also guarantee Atlantic Power’s senior debt (see the DBRS notes (1) and (2) above).

Update, 2011-10-27: Atlantic Power issued 7-year paper to yield 9.50%:

Atlantic Power Corp on
Wednesday sold $460 million of senior notes in the 144a private placement market, said IFR, a Thomson Reuters service. Morgan Stanley and TD Securities were the joint bookrunning managers for the sale.
BORROWER: ATLANTIC POWER CORPORATION
AMT $460 MLN COUPON 9.00 PCT MATURITY 11/15/2018
TYPE SR NTS ISS PRICE 97.471 FIRST PAY 5/15/2012
MOODY’S B1 YIELD 9.50 PCT SETTLEMENT 11/4/2011
S&P BB-MINUS SPREAD 784 BPS PAY FREQ SEMI-ANNUAL
FITCH N/A MORE THAN TREAS MAKE-WHOLE CALL 50 BPS

6 Responses to “CZP.PR.A, CZP.PR.B: DBRS Warns of Possible 3-Notch Downgrade”

  1. Fred Heckert says:

    I am confused about CZP.PR.A/B, are these part of the Atlantic power purchase? Are these now obligations of Atlantic power? Sell off looks overdone because of the loss of investment grade some asset managers must unload their shares.

  2. Fred Heckert says:

    Answered my own question. Got this response from investor relations.
    Effect of the Plan of Arrangement on CPILP’s Other Securities

    CPI Preferred Equity Ltd.
    CPI Preferred Equity Ltd., a subsidiary of CPILP, is authorized to issue an unlimited number of preferred shares issuable in series, of which up to 5,750,000 Cumulative Redeemable Preferred Shares, Series 1 (the ‘‘Series 1 Shares’’), 4,000,000 Cumulative Rate Reset Preferred Shares, Series 2 (the ‘‘Series 2 Shares’’) and 4,000,000 Cumulative Floating Rate Preferred Shares, Series 3 (the ‘‘Series 3 Shares’’) have been authorized for issuance.

    On the CPILP record date, CPI Preferred Equity Ltd. has issued 5,000,000 Series 1 Shares, 4,000,000 Series 2 Shares and no Series 3 Shares. The Series 1 Shares trade on the TSX under the symbol CZP.PR.A and the Series 2 Shares trade on the TSX under the symbol CZP.PR.B. CPILP has agreed to fully and unconditionally guarantee the Series 1 Shares, Series 2 Shares and Series 3 Shares on a subordinated basis as to: (i) payment of dividends, as and when declared; (ii) payment of amounts due on redemption; and (iii) payment of amounts due on liquidation, dissolution or winding up of CPI Preferred Equity Ltd. If, and for so long as, the declaration or payment of dividends on the Series 1 Shares, Series 2 Shares or Series 3 Shares is in arrears, CPILP will not make any distributions on the CPILP units. See ‘‘Capital Structure—Preferred Shares of CPEL’’ included in CPILP’s Annual Information Form dated March 11, 2011, which is delivered with, and/or incorporated by reference into, this joint proxy statement. The Series 1 Shares and Series 2 Shares will remain outstanding following completion of the Plan of Arrangement in accordance with their terms. CPILP will continue to guarantee the Series 1 Shares, Series 2 Shares and Series 3 Shares on the same terms and conditions as described above and Atlantic Power will provide substantially similar guarantees in the forms attached as Schedule J to the Arrangement Agreement.

  3. jiHymas says:

    Snap! You were posting another comment at the same time as I was updating the post.

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