AZP Upgraded to P-4(low) by S&P

Standard & Poor’s has announced:

  • On Dec. 13, 2019, S&P Global Ratings raised its issuer credit rating on Atlantic Power Corp. (APC) to ‘BB-‘ from ‘B+’ based on its improving leverage profile.
  • At the same time, S&P Global Ratings raised APLP Holdings Limited Partnership’s issue-level ratings on the $400 million outstanding term loan B, $200 million revolving credit facility, and C$210 million medium-term notes to ‘BB’ from ‘BB-‘.
  • We also raised our rating on the preferred shares at Atlantic Power Preferred Equity Ltd. to ‘B-‘ from ‘CCC+’ and P-4 (Low) from P-5 (High) on the Canadian national scale.
  • The ‘2’ recovery rating on all debt tranches is unchanged, indicating our expectation for substantial recovery (70%-90%; rounded estimate: 80%) in the event of a default.
  • We revised the outlook back to stable from positive, reflecting the predictability of highly contracted cash flows and APC’s plan to continue using excess cash to pay down debt.

S&P Global Ratings today took the rating actions listed above. We forecast Atlantic Power Corp.’s adjusted debt to EBITDA to be below 4.5x in 2020 and 2021. This is supported by APC’s highly contracted cash flow profile and management’s demonstrated track record and commitment to deleveraging. We view favorably the company paying down its existing term loan B, as well as the four acquisitions of biomass plants earlier this year. APC’s portfolio contains 21 operational power generation projects across the U.S. and two provinces in Canada–with approximately 1,900 megawatts (MW) of gross electric generation capacity and about 1,400 MW of owned capacity. Following the biomass acquisitions earlier this year, we believe the company’s portfolio shows diversity across power generation and fuel type, though scale remains limited.

The stable outlook reflects our view that cash flows are predictable due to the contractual arrangements between the power assets and the respective off-takers and that APC will use excess cash to pay down the term loan. We forecast our adjusted debt to EBITDA between 4.0x-4.5x over the next 12 months.

We could lower the rating if our forecast of adjusted debt to EBITDA indicates an upward trend of above 5.0x for a protracted period. This may due to the inability to recontract expiring PPAs or obtain new PPAs, or higher-than-expected operating costs to maintain the power assets in the portfolio. Such outcomes would consequently have a detrimental effect on cash flows and create uncertainty in cash available for debt service at APC’s level.

An upgrade is unlikely at this time, even with much improved credit metrics, in the absence of a concerted effort and demonstrated track record by the company to substantially increase size and scale that is more in line with its peers.

Affected issues are AZP.PR.A, AZP.PR.B and AZP.PR.C.

In February, 2015, S&P removed its ‘Watch Negative’ on these issues. DBRS discontinued coverage in 2014 after downgrading the preferreds to Pfd-5(high) in August 2013.

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