CSE.PR.A Downgraded to P-4(high) by S&P

Standard & Poor’s has announced:

  • We are lowering our long-term corporate credit rating on Capstone Infrastructure Corp. to ‘BB+’ from ‘BBB-‘.
  • We are also lowering our global scale preferred stock rating on Capstone to ‘B+’ from ‘BB’, and our Canada scale preferred stock rating to ‘P-4(High)’ from ‘P-3’.
  • In addition, we are placing the ratings on the company on CreditWatch with developing implications.
  • The downgrade reflects our view that Capstone’s liquidity is ‘less-than-adequate’; as per our criteria, a company with ‘less-than-adequate’ liquidity cannot have a corporate credit rating higher than ‘BB+’.
  • We believe the CreditWatch resolution could result in a return to investment-grade status for Capstone.
  • Although we consider it unlikely, if the company is unable to either pay down or extend its C$119 million bank revolver maturing in June, a multinotch downgrade could occur.


Standard & Poor’s views the company’s revenues and cash flow from long-term power purchase agreements with provincial government agencies and investment-grade off-takers as stable. In addition, we believe there is a track record of sustained high availability and operating performance of Capstone’s generation assets. We believe that offsetting these strengths are modest asset and geographic diversity, recontracting risks for two of its material generating facilities, and our expectation that the company would increase debt in executing its growth strategy. Evidence of this includes the acquisition of Bristol Water Holdings UK Ltd. While we believe that this acquisition will help to stabilize revenue in the long term, its financing has challenged liquidity.

The company has outlined several initiatives to address its liquidity position. These include refinancing some of the hydro projects under MPT Hydro L.P. and using the net proceeds to reduce debt outstanding under the CPC facility; recapitalizing Varmevarden AB (a company, which Capstone purchased in March 2011, that owns and operates a portfolio of 11 district heating businesses in Sweden) and using proceeds to reduce the amount outstanding on the senior credit facility; and other options, including a new corporate credit facility. To date, the company has completed the Varmevarden refinancing and realized proceeds of approximately C$50 million, which it used to pay down a portion of the senior credit facility.

We believe the CreditWatch resolution, which we expect to come within the next 90 days, could result in a return to investment-grade status for Capstone. Although we consider it unlikely, if the company is unable to either pay down or extend its C$119 million bank revolver maturing in June, a multinotch downgrade could occur.

Capstone is not rated by DBRS. CSE.PR.A was last mentioned on PrefBlog when it dived following a common dividend warning. CSE.PR.A is tracked by HIMIPref™ but is relegated to the Scraps index on credit concerns.

Update, 2016-2-24: S&P later affirmed the company and revised the outlook to Stable from Positive:

    •We are also affirming our ratings on the company, including our ‘BB+’ long-term corporate credit rating.
  • •The outlook revision reflects our assessment of Capstone’s stable cash flow.
  • •In addition, Capstone has taken on some additional parent-level debt in conjunction with its purchase of Renewable Energy Developers Inc., which has negatively affected parent-level credit metrics.


The outlook revision reflects our view of Capstone’s stable, albeit reduced cash flow resulting from the new contract for its power plant at Cardinal, and the company’s continued cash flow that is commensurate with the ‘BB+’ rating.

“In addition, Capstone has taken on some additional parent-level debt in conjunction with its purchase of Renewable Energy Developers Inc., which has negatively affected parent-level credit metrics,” said Standard & Poor’s credit analyst Stephen Goltz.

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