Atlantic Power Confirmed by S&P

I don’t normally highlight credit confirmations, but Atlantic Power has been in the news lately due to heightened concern about the dividend rate on the common. According to the company’s January 30 press release:

As previously disclosed in the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2013, the Company indicated that by the third quarter of 2014, it may trigger certain restrictions on its ability to make dividend payments as a result of failing the fixed charge coverage ratio included in the restricted payments covenant of the indenture governing the 9.0% Notes, which must be at least 1.75 to 1.00, measured on a rolling four quarter basis, including after giving effect to certain pro forma adjustments. The Company currently believes that primarily due to the aggregate impact of the make-whole payment and charges for unamortized debt discount and fee expenses associated with the early prepayment or redemption of securities described above (all of which will be reflected as charges to the Company’s 2014 first quarter results), the Company will fail to meet the fixed charge coverage ratio as early as late February. As a consequence, further dividend payments, which are paid at the discretion of the Company’s board of directors, in the aggregate cannot exceed the covenant’s “basket” provision of the greater of $50 million and 2% of consolidated net assets (approximately $68 million at September 30, 2013) until such time that the fixed charge coverage ratio were to be satisfied.

This affects the preferred share market because AZP.PR.A and AZP.PR.B are issued by Atlantic Power Preferred Equity Ltd. which is an indirect subsidiary and direct guarantor of Atlantic Power’s debt:

The Partnership, a wholly-owned subsidiary acquired on November 5, 2011, has outstanding Cdn$210.0 million ($211.1 million at December 31, 2012) aggregate principal amount of 5.95% senior unsecured notes, due June 2036 (the ‘‘Partnership Notes’’). Interest on the Partnership Notes is payable semi-annually at 5.95%. Pursuant to the terms of the Partnership Notes, we must meet certain financial and other covenants, including a financial covenant generally based on the ratio of debt to capitalization of the Partnership. The Partnership Notes are guaranteed by Atlantic Power Preferred Equity Ltd., an indirect, wholly-owned subsidiary acquired in connection with the acquisition of the Partnership and Atlantic Power.

So the stock’s been hammered, closing at $3.50 on January 30 before the press release and at $2.69 February 3, with heavy volume in between.

Standard and Poor’s has affirmed the credit quality of Atlantic Power:

  • •U.S. electric power developer and operator Atlantic Power Corp. is proposing to refinance $190 million of Curtis Palmer notes due in July 2014 and $225 million of U.S. general partner notes due in 2015 and 2017.
  • •Atlantic Power proposes to issue a $600 million first-lien term loan B (TLB) and a $200 million first-lien working capital facility (revolver) at Atlantic Power Limited Partnership (APLP), a wholly owned subsidiary of Atlantic Power. We are assigning our ‘B+’ issue rating and ‘2’ recovery rating to the debt.
  • •Proceeds from the refinancing will be used to make a distribution to Atlantic Power.
  • •At the parent level, Atlantic Power will use these distributions and cash-on-hand to pay down $150 million of its $460 million notes due in 2018 and C$46 million of convertible debentures due in October 2014.
  • •We are affirming our ‘B’ corporate credit rating on Atlantic Power and APLP. We are also assigning issue and recovery ratings for the debt of the company and its various subsidiaries. The outlook is stable.

The stable outlook reflects Atlantic Power’s mostly contracted portfolio, and our expectations that CFADS to debt and CFADs to interest coverage will be about 10% and 1.3x, respectively, and liquidity will be adequate. We could raise the rating if operational improvements increase EBITDA significantly or due to the focus on debt reduction, CFADS to debt and CFADS to interest ratios improve to around 15% and 2x to 2.2x. We could lower the rating if generation is lower than expected or maintenance costs are higher, and negatively impact cash distributions.

S&P’s rating on AZP.PR.A and AZP.PR.B remains at P-5, where they were downgraded last July.

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