INE.PR.A , INE.PR.C : Off Watch-Negative But Now Outlook-Negative by S&P

Standard & Poor’s has announced:

  • On Feb. 6, 2020, Innergex Renewable Energy Inc. (Innergex) and Hydro-Quebec announced the formation of a strategic partnership whereby Hydro-Quebec has invested C$661 million in Innergex’s equity through a private placement, and committed to C$500 million in further capital for future co-investments in renewable energy projects globally.
  • We view Hydro-Quebec’s equity investment in Innergex as supportive for the rating. Therefore, we are removing the issuer credit rating (ICR) and preferred share rating from CreditWatch, where they were placed with negative implications on Dec. 23, 2019. At the same time, we are affirming our ‘BBB-‘ ICR on the company and our ‘BB’ global scale and ‘P-3’ Canada scale preferred stock ratings on the company.
  • The negative outlook reflects limited headroom to withstand financial underperformance, increased debt levels, or any other credit-negative events. We believe there is a one-in-three likelihood that leverage could be higher than our base-case forecast.
  • We continue to assess the business risk profile as satisfactory, underpinned by high levels of contractedness and counterparty strength, reasonable asset performance, and good diversity.

While we acknowledge that the equity issuance helps improve Innergex’s credit metrics to an extent that it supports the rating, we believe there is a likelihood that leverage could be higher than our base-case forecast and possibly below the downside trigger given limited headroom, rapid development track record, and aggressive use of corporate debt to fund equity in projects. Our forecast assumptions also incorporate asset-level financing for some of the company’s projects that are currently under construction. This ultimately has a positive impact on holdco debt and our calculated metrics, which could be adversely affected if the financings are delayed or amounts differ from plan. Finally, Hydro-Quebec is committed to co-invest C$500 million with Innergex in suitable renewable projects over the next three years. Details on the deployment of this capital (timing, development versus acquisition, financing, incremental cash flow, etc.) are unknown, but in our view, the risk remains that leverage could be higher than our base-case forecast if Innergex relies heavily on corporate debt to co-fund equity in these investments.

The negative outlook reflects FFO-to-debt of about 23% in 2020, which is at the cusp of the downside trigger. We believe that Innergex will continue with its strategy of funding the equity portion of its development pipeline with corporate debt and will have limited free cash flow to reduce holdco debt given its ambitious growth plans. Therefore, we believe that there is a one-in-three likelihood that leverage could be higher than our base-case forecast.

We could lower the rating if we expect that Innergex will be unable to achieve FFO-to-debt of at least 23% in 2020 and beyond. This would likely occur if the company continues to rely heavily on corporate-level debt financing to support its expansion plans, or if its financial performance falls short of our base-case forecast.

We could revise the outlook to stable if Innergex deleverages at the holdco level and builds a reasonable cushion in its credit metrics. We would look for FFO-to-debt of at least 24%-26% on a sustained basis before revising the outlook.

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

The now-cancelled Watch-Negative was previously reported on PrefBlog.

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