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Rating Action:

Moody's assigns Baa3 rating to Orsted's hybrid notes, stable outlook

29 Nov 2022

Paris, November 29, 2022 -- Moody's Investors Service (Moody's) has today assigned a Baa3 long-term rating to the Callable Subordinated Capital Securities (the Green Hybrids) to be issued by Orsted A/S (Orsted). The outlook is stable.

RATINGS RATIONALE

The Baa3 rating assigned to the Green Hybrids is two notches below Orsted's Baa1 long-term issuer rating, reflecting the features of the Green Hybrids. The Green Hybrids have a maturity of 1,000 years and are deeply subordinated, ranking behind Orsted's senior unsecured debt, but before the rights of shareholders.  In addition, there are no events of default and Orsted can, at its option, choose to defer coupons on a cumulative basis. There is no step up in interest rate over the life of the instrument greater than 100 basis points over the initial credit spread. The rating is in line with those of existing hybrid notes issued by the company.

In Moody's view, the Green Hybrids have equity-like features that allow them to receive basket 'C' treatment (i.e., 50% equity or "hybrid equity credit" and 50% debt for financial leverage purposes). Please refer to Moody's Cross-Sector Rating Methodology "Hybrid Equity Credit" (September 2018) for further details.

As the Green Hybrids' rating is positioned relative to another rating of Orsted, a change in either (1) Moody's relative notching practice; or (2) the Baa1 long-term issuer rating of Orsted, could affect the Green Hybrids' rating.

The Baa1 issuer rating continues to reflect (1) the company's position as the world's leading offshore wind developer with a growing portfolio of operational offshore wind assets; and (2) the significant contribution from long-term contracted cash flows under generally predictable and well-established regulatory regimes, with limited merchant power exposure.

Orsted's credit quality is, however, constrained by (1) the execution and financing risk associated with development of offshore wind, including in new locations, although Moody's acknowledges the company's solid track record; (2) exposure to greater development and construction risks than its ownership would imply under the partnership model; and (3) limited technology diversification, with offshore wind accounting for the majority of Orsted's installed capacity and earnings.

Given 50.1% ownership by the Government of Denmark (Aaa stable), Moody's considers the company to be a government-related issuer. The Baa1 long-term issuer rating incorporates a one-notch uplift from Orsted's standalone credit quality, expressed as a Baseline Credit Assessment (BCA) of baa2, based on Moody's assessment of moderate support and moderate dependence. Moody's assumption of a moderate support takes account of the government's ownership stake and its supportive stance towards Orsted's strategy.

RATIONALE FOR STABLE OUTLOOK

The stable outlook reflects our expectation that (1) Orsted will be able to maintain financial metrics in line with guidance for the current rating, which is to maintain as a minimum, funds from operations (FFO)/net debt above 25%; and (2) the company will continue to manage its portfolio of development projects on time and on budget.

Moody's views income from construction margins and divestment gains as being of a lower quality than Orsted's earnings from other core activities. The rating agency further notes that the volatility of construction related income makes it a less useful indicator of cash flow generation in the year that it is booked. Accordingly, and in considering Orsted's performance against ratio guidance, Moody's will look to determine the core income and cash flow generating capacity.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATING

Upward pressure could develop should Orsted succeed in maintaining FFO/Net Debt at least in the low 30s per cent on a sustainable basis. At the same time, Moody's would expect no deterioration in Orsted's business profile.

Downward pressure on Orsted's ratings could develop if (1) the company's financial profile deteriorates such that FFO/Net debt is likely to fall persistently below guidance for the current rating; or (2) the company's development projects incur significant delays and/ or cost overruns. A reduction in the government support assumption incorporated into Orsted's rating would also likely result in a downward rating pressure.

The methodologies used in this rating were Unregulated Utilities and Unregulated Power Companies published in May 2017 and available at https://ratings.moodys.com/api/rmc-documents/75129, and Government-Related Issuers Methodology published in February 2020 and available at https://ratings.moodys.com/api/rmc-documents/64864. Alternatively, please see the Rating Methodologies page on https://ratings.moodys.com  for a copy of these methodologies.

Orsted A/S is the world's largest developer and operator of offshore wind, with increasing presence in the onshore wind segment. Its largest shareholder is the Government of Denmark, which holds 50.1% of the company's shares.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found on https://ratings.moodys.com/rating-definitions.

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 issuer/deal page for the respective issuer on https://ratings.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.

The rating has been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

This rating is solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website https://ratings.moodys.com.

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

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://ratings.moodys.com/documents/PBC_1288235.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on https://ratings.moodys.com.

Please see https://ratings.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 issuer/deal page on https://ratings.moodys.com for additional regulatory disclosures for each credit rating.

Knut Slatten
VP - Senior Credit Officer
Infrastructure Finance Group
Moody's France SAS
96 Boulevard Haussmann
Paris, 75008
France
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Andrew Blease
Associate Managing Director
Infrastructure Finance Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Releasing Office:
Moody's France SAS
96 Boulevard Haussmann
Paris, 75008
France
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

No Related Data.
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