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Rating Action:

Moody's assigns Ba3 rating to Terraform Power Operating's new senior unsecured notes; affirms Ba3 CFR; stable outlook

10 Oct 2019

Approximately $2.5 billion of debt securities affected

New York, October 10, 2019 -- Moody's Investors Service ("Moody's") today assigned a Ba3 rating to TerraForm Power Operating LLC's (TPO or yieldco) proposed issuance of up to $700 million of senior unsecured notes. Concurrently, Moody's affirmed TPO's Ba3 corporate family rating (CFR) and Ba3-PD Probability of Default rating. Moody's also upgraded the ratings on TPO's existing senior unsecured debt to Ba3 from B1. We expect to withdraw TPO's Ba1 senior secured bank loan rating when it is repaid. TPO's speculative grade liquidity rating remains SGL-2. The outlook is stable.

TPO plans to use the proceeds raised in connection with the proposed notes issuance to repay in full amounts outstanding under its term loan that was scheduled to mature in 2022 and to redeem in full its $300 million of senior unsecured notes due in 2025. On October 8, Terraform Power, Inc. (TERP; unrated), the public parent of TPO, completed the issuance of nearly $300 million in common stock, including a $50 million private placement offering. The common stock offerings diluted the ownership of affiliates of Brookfield Asset Management Inc. (BAM; Baa1, stable) to 61% from 65%. TERP will use the proceeds from these equity offerings for working capital purposes.

RATINGS RATIONALE

The ratings affirmation of TPO's Ba3 CFR reflects the company's portfolio of operating renewable assets that are contracted with off-takers with an overall good credit quality. Their remaining weighted average life hovers around 13 years. The Ba3 rating acknowledges some geographic diversity benefits with assets located across the US as well as Spain, Portugal, Chile and Uruguay. The credit quality also factors in some operational diversity with wind farms representing around 59% of its installed capacity although the solar assets' total contribution to TPO's total revenues at 52% is slightly higher than their relative contribution to the total installed capacity.

At the end of September 2019, TPO completed the acquisition of a portfolio of 320 MW of distributed solar assets from Alta Gas Ltd, through TerraForm Arcadia Holdings, LLC (Arcadia). This transaction has doubled the size of TPO's portfolio of distributed solar assets to around 700 MW. So far, TPO is the yieldco with the highest exposure to this renewable business. These assets' smaller size, lower transparency given the multi-party agreements and higher overhead drive our view that the risk of these operations is slightly higher compared to larger scale renewable projects. That said, TPO's credit quality also considers that these operations represent less than 20% of TPO's total installed capacity of around 4.1 GW.

TPO has identified some organic opportunities, largely in connection with the repowering of existing windfarms while it continues to implement cost saving initiatives to enhance its cash flows. However, TPO's growth strategy is largely focused on opportunistic acquisitions. Examples of TPO's opportunistic acquisitions include the Arcadia transaction (acquisition size: $720 million) and the Saeta Yield S.A. transaction (acquisition completed in June 2018 for $1.2 billion). This strategy tempers TPO's credit quality because it is less transparent compared to its peer yieldco expansion plans that are largely based on a pre-identified pipeline of assets.

TPO's stable outlook acknowledges the gradual improvement in the yieldco's capital structure and ability to cope with medium term re-contracting risk as TPO is gradually increasing the amount of asset level amortizing debt arrangements and reducing its significant historical reliance on incremental holding debt to fund its capital requirements. The stable outlook also acknowledges the improvement in consolidated credit metrics and TERP's equity issuances that have helped to reduce leverage as well as the financial benefits of ownership by BAM affiliates. The stable outlook anticipates that TPO's ratio of debt to EBITDA will hover around 7.5x at year-end 2019.

Liquidity

TPO's SGL-2 speculative grade liquidity rating reflects good liquidity. It assumes that the yieldco will re-invest a portion of its cash flow available for distribution (CAFD) based on a payout ratio of a maximum of 85% and dividend growth ranging between 5-8%. The SGL-2 also considers the yieldco's sizeable credit facilities. On October 8, 2019, TPO amended its secured revolving credit facility by extending the maturity by one year to October 5, 2024 and increasing the size by $200 million to up to $800 million, a credit positive. The SGL-2 reflects the significant repayment of the outstanding borrowings under this credit facility which now stands at $51 million. TPO used borrowings under this credit facility along with a $475 million two-year bridge loan, to help fund the aforementioned Arcadia acquisition. In addition, since 2017, TERP has had access to a $500 million credit line from the sponsor BAM due in 2022 which has only been utilized to help fund the Saeta acquisition. TPO has indicated that it remains in compliance with the financial covenants under the legal documentation although it does not publicly disclose its covenant calculation. The SGL-2 also considers that TPO could obtain additional access to liquidity if necessary from the sale of its assets that, although decreasing in number, still remain unencumbered. Following the planned repayment of the term loan due in 2022 and the 2025 Notes, TERP's next maturity consists of its $500 million Notes due in 2023.

Structural considerations

TPO's individual securities ratings reflect Moody's Loss Given Default (LGD) methodology. This is based upon TPO's Ba3 corporate family rating (CFR), its Ba3-PD Probability of Default Rating and the capital structure composition in terms of the outstanding amount of unsecured debt and the collateral provided to its secured lenders, primarily in the form of stock of subsidiaries. Following the full repayment of the outstanding amounts under the term loan, the group's only secured debt will consist of TPO's $800 million revolving credit facility as well as TERP's sponsor line of credit. As a result, recovery prospects on the company's senior unsecured debt has improved, as reflected in the upgrade of the rating on TPO's unsecured notes to Ba3 compared to the previous B1 rating.

Factors that could lead to an upgrade

TPO's corporate family rating could experience positive momentum if its consolidated debt to EBITDA falls below 7.0x, on a sustainable basis.

Factors that could lead to a downgrade

A downgrade is likely if TPO's leverage deteriorates such that its consolidated debt to EBITDA exceeds 8x (considering full-year financial performance of any acquired assets), on a sustained basis. TPO's ratings could also be lowered should the funding of its growth initiatives become more aggressive than currently anticipated.

Affirmations:

..Issuer: TerraForm Power Operating LLC

.... Corporate Family Rating, Affirmed Ba3

.... Probability of Default Rating, Affirmed Ba3-PD

.... Senior Secured Bank Credit Facility, Affirmed Ba1 (LGD2)

Upgrades:

..Issuer: TerraForm Power Operating LLC

.... Gtd Senior Unsecured Regular Bond/Debenture, Upgraded to Ba3 (LGD4) from B1 (LGD5)

Assignments:

..Issuer: TerraForm Power Operating LLC

.... Gtd Senior Unsecured Regular Bond/Debenture, Assigned Ba3 (LGD4)

Outlook Actions:

..Issuer: TerraForm Power Operating LLC

.... Outlook, Remains Stable

The principal methodology used in these ratings was Unregulated Utilities and Unregulated Power Companies published in May 2017. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Natividad Martel
Vice President - Senior Analyst
Infrastructure Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Michael G. Haggarty
Associate Managing Director
Infrastructure Finance Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
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