INE.PR.A and INE.PR.C On Watch-Negative By S&P

Last year Standard & Poor’s announced (on 2018-12-27):

  • On Dec. 27, 2019, S&P Global Ratings revised its outlook on Innergex Renewable Energy Inc. to negative from stable, and affirmed its ratings, including its ‘BBB-‘ long-term issuer credit rating, on Innergex.
  • We expect Innergex to have weak financial metrics in 2018 due to the timing and financing of acquisitions, although it expects these to improve in 2019.
  • Innergex is issuing nonrecourse debt at the asset level and intends to sell its HS Orka geothermal assets in Iceland, using proceeds to reduce parent-level debt; however, this introduces incremental execution risk.
  • If the debt reduction strategy is delayed or the amount is lower than expected, financial metrics might not recover to the 24%-26% range, which could result in a downgrade.

S&P Global Ratings today took the rating actions listed above. Innergex has completed a number of acquisitions in 2018 that have increased leverage both through acquired debt and development financing at the corporate level. Although the company expects to de-lever in 2019 through asset level financing and asset sales, we believe that there is execution risk with this strategy. Our financial forecasts
project Innergex moving back into the stable range of 24%-26% funds from operations (FFO)-to-debt in 2019. However, they are predicated on completing asset sales, which raises significant execution risk and reflects our outlook revision to negative from stable.

The negative outlook reflects significantly lower FFO-to-debt ratios of about 18% in 2018, compared with expectations of 23% at the ‘BBB-‘ level. S&P Global Ratings’ expects Innergex to face execution risk with its strategy of improving forecast financial metrics through asset level financing and asset sales, and the outlook reflects the deteriorating financial performance. S&P Global Ratings expects FFO-to-debt to recover to the 24%-26% range in 2019 and 2020.

A downgrade could happen if the FFO-to-debt ratio does not recover and remains above 23% over our two-year outlook period. This could result from Innergex’s inability to execute on its asset sale plan that it would use to reduce nonrecourse debt. In addition, given the limited cushion in financial metrics above the 23% FFO-to-debt downgrade trigger, lower-than-expected distributions from its subsidiary assets or an increase in nonrecourse debt used to finance development or acquisition opportunities could lead to a downgrade.

An outlook revision to stable could occur if Innergex deleverages, by paying down bridge and revolving credit facility with asset sales, such that FFO-to-debt metrics return to, and stay in, the 24%-26% range.

S&P has now announced:

  • On Dec. 23, 2019, S&P Global Ratings placed its ‘BBB-‘ issuer credit rating on Innergex Renewable Energy Inc. (Innergex) and its ‘BB’ issue-level ratings on the company’s preferred shares on CreditWatch with negative implications.
  • The CreditWatch placement reflects notable weakness in Innergex’s credit metrics from last year.
  • We intend to resolve the CreditWatch in the next 90 days.

S&P Global Ratings today took the rating actions listed above. The company has been on an aggressive growth path and, since the beginning of 2018, has either acquired or developed 1.5 gigawatts of cumulative incremental capacity. While a considerable portion of these capacity additions have ultimately been financed with project-level debt, Innergex’s corporate debt includes the equity contributions from both previous transactions, as well as for projects that are in development or under construction. The company sold its Icelandic asset in 2019 and used the proceeds to reduce holdco debt; however, its debt levels have nevertheless remained elevated due to continued investments in newer projects. We believe that if Innergex does not take credit-positive actions to address the continuing amount of heightened leverage, there would be negative implications for the rating.

The CreditWatch placement reflects continuing amounts of heightened leverage at the holdco level. If Innergex does not take steps to reduce debt, we would lower the rating. We intend to resolve the CreditWatch in the next 90 days.

Affected issues are INE.PR.A and INE.PR.C.

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