TA: Trend Changed To Negative By DBRS

DBRS has announced that it:

has today changed the trends of all long-term debt ratings of Capital Power Corporation, Capital Power L.P. and TransAlta Corporation (collectively, the IPPs) to Negative from Stable. DBRS has also changed the trend of TransAlta Corporation’s preferred share rating to Negative from Stable. The rating actions reflect DBRS’s concern that the continued challenging wholesale power market environment and heightened political risk in Alberta may lead the IPPs’ credit risk profile to deteriorate to a level that is no longer consistent with their respective rating categories. The rating actions at this time are limited to trend changes with no immediate rating downgrades, as the negative factors that could lead to downward rating pressure are over the medium to long term. DBRS does not anticipate any material weakness in the IPPs’ financial profile in 2016 from 2015, largely because of strong hedging support and manageable capital spending, despite lower power prices in Alberta.

DBRS believes the continued weak operating environment and the effect of Alberta Climate Leadership Plan (ACLP) combined will gradually weaken several primary business risk profile factors for the IPPs, including (a) hedging profile, particularly post-2020, as all long-term Alberta power purchase arrangements (PPAs) expire by 2020; (b) market position; and (c) market structure and environment. A weakening business risk profile will likely result in a one-notch downgrade to BBB (low) from BBB for the IPPs. A multi-notch downgrade below investment grade is unlikely in the foreseeable future, unless the implementation of the ACLP would materially affect the IPPs’ financial flexibility and profitability.

While TransAlta is less affected by the Alberta climate change strategy than Capital Power, the phase-out of all coal plants by 2030 and rising carbon compliance costs also have potential negative rating implications for TransAlta. Furthermore, TransAlta’s key credit metrics have remained relatively constrained for the current rating, which provides TransAlta with very limited financial flexibility. DBRS acknowledges that TransAlta has responded to the weak power pricing environment by cutting dividends and implementing cost-saving measures.

There are four issues affected by this trend change: TA.PR.D, TA.PR.F, TA.PR.H and TA.PR.J. The first of these, TA.PR.D, will reset at 2.709% on March 31.

I don’t often publish Implied Volatility Analysis for this series – so here it is:

Click for Big

Leave a Reply

You must be logged in to post a comment.