AZP.PR.A, AZP.PR.B and AZP.PR.C Removed From Watch-Negative By S&P

Standard & Poor’s has announced:

  • •We are affirming our ‘B’ corporate credit ratings on U.S. power generator Atlantic Power Corp. (APC) and affiliate Atlantic Power Limited Partnership, and are removing them from CreditWatch with negative implications.
  • •At the same time, we are revising our recovery ratings on APC’s senior unsecured debt to ‘2’ from ‘4’.
  • •The outlook on all ratings is stable.

The CreditWatch placement followed the departure of the company’s CEO and a significant cut in distributions by the company that had triggered our review of the company’s financial plan. In September 2014, APC had lowered its dividend by 70% (C$0.12 annually from C$0.40), a second distribution cut in 18 months, following a 65% reduction in February 2013. The company had also revised its distribution payments to a quarterly schedule from monthly payouts. The company had cited a reevaluation of its medium-term plan, including debt maturities and recontracting risk from 2017 onward that had caused the change in its payout policy.

The challenge management faces at this point is the relatively high leverage as it deals with recontracting risk in 2017 and 2018. Atlantic is considering selling assets (the company has made statements that its wind assets could be candidates for sale) and using proceeds for deleveraging.

We are affirming the ratings based on our expectations that:

  • •The sale of the wind portfolio would appear to be a likely divestment by the company. APC is not restricted by its capital structure on use of proceeds and wind assets appear to be attractive assets in the current market.
  • •Even if a sale does not close successfully, ratios are incrementally weaker but the level of financial performance on a quality of cash flow (QCF) score of ‘6’ is adequate for the rating.
  • •There are no debt acceleration covenants in the documents. If Atlantic cannot meet its EBITDA to interest covenant it will have restrictions on dividend payments over a specified amount, but the covenant breach is not an event of default.
  • •We expect the company to be in compliance with its covenants in first-half 2015 (APC’s bond fixed-charge ratio was not in compliance at year-end 2014 because of make-whole charges incurred in February 2014).
  • •Management changes have concluded and a new CEO has taken charge.

“The stable outlook reflects our expectation that the company will maintain POCF to mandatory debt service levels above 1.9x and POCF to debt above 13%,” said Standard & Poor’s credit analyst Aneesh Prabhu.

We also expect POCF to interest levels to be above 2x. Selling the wind assets will not change these levels materially, but we expect a potential sale (and proceeds used for debt reduction) to move consolidated debt leverages, as reflected in consolidated debt to EBITDA by 50 basis points to below 6x by year-end 2015, which supports ratings.

The now concluded ‘Watch-Negative’ was reported on PrefBlog 2014-9-17.

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