TA Downgraded to P-4(high) by S&P

On March 26, S&P placed TA on Creditwatch-Negative:

  • Calgary, Alta.-based TransAlta Corp. has announced that it entered into an agreement with Brookfield Renewable Partners L.P. with respect to the partial sale of TransAlta’s Alberta hydro assets.
  • As part of this transaction, TransAlta will issue C$350 million in debentures to Brookfield over the coming weeks, mainly to fund future shareholder returns and subsequently issue C$400 million in preferred stock in October 2020 to repay debt maturing in November 2020. Brookfield will also increase its equity investment in TransAlta to 9%. The debentures and preferred shares are expected to convert to a partial interest in TransAlta’s hydro assets in 2025.
  • S&P Global Ratings placed its ‘BBB-‘ issuer credit rating on TransAlta and its issue-level ratings on the company’s debt on CreditWatch with negative implications.
  • TransAlta’s leverage remains elevated for the rating, and the CreditWatch placement reflects a greater than 1-in-2 chance of a downgrade if we are not convinced that the company can improve its funds from operations (FFO) to debt to about 22% or debt to EBITDA would not decrease below 3.5x by 2020.
  • We expect to resolve the CreditWatch over the next 90 days after meeting with company management to evaluate its plans to reduce leverage over the next two years and to manage execution risk while increasing its natural gas and renewables generation portfolio.

They have now downgraded Transalta:

  • Calgary, Alberta-based TransAlta Corp.’s leverage is expected to remain elevated over the next two years following its agreement with Brookfield to borrow $350 million in subordinated debentures and planned $400 million preferred stock issuance (which we view as debt) to fund share repurchases, refinance debt, and accelerate coal-to-gas power plant conversion.
  • We expect the company’s funds from operations (FFO) to debt to remain below 22% and debt to EBITDA above 3.5x (our downgrade thresholds for the rating) for a prolonged period. Consequently, we are lowering our issuer credit rating and senior unsecured issue-level ratings on TransAlta to ‘BB+’ from ‘BBB-‘. We are also lowering our preferred stock rating to ‘B+’ from ‘BB’ and our Canadian preferred stock rating to ‘P-4’ (high) from ‘P-3’.
  • We are assigning our ‘3’ recovery rating to the company’s senior unsecured debt, reflecting our expectation of meaningful recovery in a default scenario.
  • We are removing the ratings from CreditWatch, where we placed them March 26, 2019, with negative implications following the announcement of the Brookfield transaction. The outlook is stable.
  • The stable outlook reflects our expectation of relatively stable operating performance under transitionary industry conditions toward cleaner burning fuels. We expect FFO to debt to remain 16%-17% through 2020 and leverage reduction in the longer term to be driven by improved realizations for its hydroelectric plants following the expiration of under-market-price power purchase agreements (PPAs) in 2020 and the placement of a capacity market in Alberta in November 2021.

We could lower our ratings if we expect FFO to debt to fall below 14% or debt to EBITDA to increase above 4.75x for a prolonged period. This could likely result from significant declines in capacity and power prices in Alberta or significant operating challenges resulting from the coal-to-gas conversion. While less likely, we could lower ratings because of aggressive financial policy changes characterized by meaningful increases in dividends or share repurchases, or a weaker business profile characterized by the sale of contracted assets such that less than 50% of EBITDA is generated by contracted assets.

While unlikely over the next 24 months, we could consider an upgrade if TransAlta successfully pursues coal-to-gas conversions, exhibits good profitability from the converted plants, and materially improves financial performance. More specifically, an upgrade would require sustained FFO to debt above 22% and debt to EBITDA below 3.5x.

Affected issues are TA.PR.D, TA.PR.E, TA.PR.F, TA.PR.H and TA.PR.J.

Leave a Reply

You must be logged in to post a comment.