PrefBlog

Standard & Poor’s has announced:

• •Standard & Poor’s Ratings Services published its “Methodology For Companies With Noncontrolling Equity Interests” criteria Jan. 5, 2016.
• •We are removing all ratings on Valener Inc. from “under criteria observation” (UCO) and lowering the corporate credit rating to ‘BB+’ from ‘BBB+’.
• •We are also lowering our global-scale preferred share rating to ‘B+’ from ‘BBB-‘, and our Canada-scale preferred share rating to ‘P-4(High)’ from ‘P-2(Low)’.
• •The criteria look at structural subordination of Valener relative to the investee company, Gaz Metro L.P., and its discretionary dividends that Valener does not control.
• •Finally, we are withdrawing all ratings at the company’s request.

Standard & Poor’s Ratings Services removed all its ratings on Montreal-based Valener Inc. from “under criteria observation” (UCO) and lowered its long-term corporate credit rating on Valener to ‘BB+’ from ‘BBB+’. The outlook is stable.

At the same time, Standard & Poor’s lowered its issue-level rating on Valener’s preferred shares to ‘B+’ from ‘BBB-‘ and its national scale rating preferred shares to ‘P-4(High)’ from ‘P-2(Low)’. Standard & Poor’s then withdrew all ratings at the company’s request.

“The downgrade reflects the implementation of the ‘Methodology For Companies With Noncontrolling Equity Interests’ criteria,” said Standard & Poor’s credit analyst Andrew Ng.

We base this on the seniority of the distributions from Gaz Metro L.P. (GMLP), which are the only material source of cash flow for the company. The difference relative to the corporate credit rating on Gaz Metro L.P. (A/Stable/–), of which Valener owns a 29% equity interest, would be four notches as per the criteria if not for the SACP’s capping at ‘bb+’ based on the factors outlined in the criteria.

In the criteria, we developed an approach to establish an SACP on companies whose only significant assets consist of one or two noncontrolling equity stakes in other unrelated corporate entities. We typically rate these entities three-to-six notches below the underlying entity.

The notching differential reflects the structural subordination of Valener relative to GMLP and its discretionary dividends that Valener does not completely control. The main factors that determine the number of notches below the SACP on the investee company include cash flow stability, corporate governance and financial policy, financial ratios, and the ability to liquidate investments.

DBRS confirmed their rating at Pfd-2(low) on December 21:

DBRS Limited (DBRS) has today confirmed Valener Inc.’s (Valener or the Company) Cumulative Rate Reset Preferred Shares, Series A rating at Pfd-2 (low) with a Stable trend. Valener’s preferred share rating is based on the credit quality of Gaz Métro Limited Partnership (the Partnership), which guarantees the First Mortgage Bonds and Senior Secured Notes (rated “A”) of Gaz Métro inc. The one-notch differential in the ratings of Valener and the Partnership reflects the structural subordination at Valener.

For the fiscal year ended September 30, 2015 (F2015), Valener’s operating cash flow continued to support its common and preferred shares dividend payments ($33.8 million and $4.4 million, respectively). The Company’s operating cash flow primarily consists of distributions from its 29% ownership in the Partnership and, to a lesser extent, distributions from its financial interest in wind farm projects. Distributions received from GMLP and the wind assets combined improved favourably to $53.5 million in F2015 from $50.4 million in F2014, driven by record results at GMLP and strong wind farm performance. The distributions from the aforementioned entities are expected to further rise in F2016 as a result of the sustained growth of GMLP’s regulated activities.

Although distributions from the Partnership could be curtailed if the viability of the Partnership were to need safeguarding, the Partnership has historically provided stable distributions to its equity holders. The Partnership has made cash distributions to its partners in an amount of over 90% of its net income, excluding non-recurring items, for most of the last 20 years.

As the Company has no bonds/debentures issued, and is not expected to issue any long-term debt in the foreseeable future, its leverage solely consists of its credit facility outstanding. As at September 30, 2015, Valener utilized approximately $120 million of the $200 million credit facility which matures on September 30, 2020. Valener’s debt-to-capital ratio was reasonable at approximately 14.3% as at September 30, 2015. Valener is expected to fund future growth investments in a prudent manner to maintain leverage within the 20% threshold. If Valener is unable to do so on a sustained basis, this could result in a negative rating action. Other key non-consolidated credit metrics have also remained supportive of the current rating category, including cash flow-to-interest at 38.8 times, cash-flow fixed coverage at 10.4 times and cash flow-to-debt at 49.7% in F2015.

Update, 2016-1-15: Valener commented:

Valener Inc. (“Valener”) (TSX: VNR) (TSX: VNR.PR.A) today announced that it has requested a withdrawal of its Standard & Poor’s (“S&P”) corporate credit rating following a methodology change that resulted in what it views as an unjustified downgrade by the rating agency.

As a result of the application of new criteria set forth by S&P when rating companies with one or two non-controlling equity interests (“NCEI”), Valener’s corporate credit rating was downgraded from BBB+ to BB+ earlier today. Upon review of the new methodology, which includes the introduction of a cap of BB+ on companies with one or two NCEI, Valener notified S&P that the resulting credit rating would not accurately take into consideration the company’s investment in Gaz Métro Limited Partnership (“Gaz Métro”), an investment grade company with a corporate credit rating of A. Also, it would fail to provide an accurate assessment of Valener’s creditworthiness, especially considering that just a few weeks ago, in December, S&P reiterated Valener’s BBB+ rating, and that there has been no change in the company’s financial situation since.

“It is Valener’s opinion that the new methodology does not accurately reflect the quality and stability of cash flows of Gaz Métro, Valener’s principal investment, and as such is unfairly punitive. What’s more, Valener is well represented on Gaz Métro’s board and has significant influence on Gaz Métro’s distributions to unitholders,” said Pierre Monahan, Chairman of Valener’s board of directors. “The downgrade attributed by S&P is purely the result of an amendment to the rating agency’s methodology, not the outcome of an event affecting Valener’s or Gaz Métro’s operations, and as such, Valener has suspended its relationship with Standard & Poor’s and has asked to have its credit rating withdrawn. We are confident that this will not affect Valener’s ability to borrow additional funds”.

Valener remains rated by DBRS, with a current corporate credit rating of BBB+.

This entry was posted on Tuesday, January 12th, 2016 at 7:50 pm and is filed under Issue Comments. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.