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Rating Action:

Moody's changes outlook on Infinis's B1 ratings to negative; confirms ratings

18 Dec 2015

London, 18 December 2015 -- Moody's Investors Service, ("Moody's") has today changed the outlook to negative on the B1 corporate family rating (CFR) of British renewable energy company Infinis Energy Plc (Infinis), its Ba3-PD probability of default rating (PDR) and the B1 rating on the GBP350 million senior notes due 2019 issued by the group's landfill gas business, Infinis Plc.

At the same time, the rating agency confirmed all of the above ratings. This concludes the review of the ratings that was initiated on 27 October 2015.

The action follows yesterday's announcement by Infinis that the High Court of Justice of England and Wales-sanctioned Scheme of Arrangement ("the Scheme") has come into effect. Under the Scheme, Infinis's majority shareholder, Monterey Capital II S.à.r.l. (Monterey), which is ultimately owned by private equity fund Terra Firma, can tender an offer to purchase the 31.5% of shares in the company that it does not already own.

RATINGS RATIONALE

-- OUTLOOK CHANGE TO NEGATIVE --

Today's decision to change the outlook to negative primarily reflects (1) uncertainty related to the possible future sales of Infinis's onshore wind and landfill gas businesses and (2) the potential negative impact of the disposals on the business and financial risk profile together with the lack of clarity regarding its future financial policy.

Terra Firma sold the 31.5% stake in Infinis through an initial public offering in November 2013 with a view to a gradual sell-down of its remaining shareholding over time. In December 2014, Terra Firma said that it had become clear that a managed sell-down through secondary offerings was unlikely to materialise at an acceptable price and announced that it was exploring other options. On 22 October 2015, Monterey announced an offer for the Infinis shares that it had previously sold, with a view to taking the company private, and the acquisition was approved by shareholders on 4 December 2015.

According to the offer announcement, Terra Firma believes that separate sales of the wind portfolio and landfill gas businesses are the optimal path for Terra Firma to achieve an exit from its investment in Infinis. Moody's views as a credit positive the current diversification of Infinis's generation portfolio. While continuing investment in the onshore wind business would increase the group's consolidated leverage in the short term, future earnings from wind would offset the expected decline in revenues from the landfill gas assets which poses a risk in the context of the future refinancing of the notes. Subject to the use of proceeds and the future strategy and financial policy of the remaining business, a disposal may therefore be credit negative.

Moody's downgraded Infinis's ratings in October 2015, changing the CFR to B1 from Ba3, following the UK government's July 2015 decision to remove the exemption of Renewable Source Energy from the CCL, a tax on energy use and in the context of weak power prices. The rating and stable outlook incorporated an expectation of a dividend cut to preserve the financial profile commensurate with a B1 CFR. While Infinis announced at its FY2016 half year results it would not be paying an interim dividend for the six months to 30 September 2015 this was as a consequence of the offer for the group rather than a commitment to a particular future dividend policy. Clarity on financial policy is not expected until early 2016 when Monterey will have 100% control.

Whilst Monterey have stated their intention to sell the wind assets, impacting the future business risk profile of Infinis, there remains uncertainty about how this will be done and a degree of execution risk. Moody's expects that proceeds from the sale would be used to (1) repay the debt facilities secured on the wind assets and, through a dividend paid by Infinis, the additional debt carried by Monterey to purchase the remaining shares (GBP175 million); and (2) pay the fees and transaction expenses in connection with the acquisition and the new loan facility.

-- CONFIRMATION OF B1 RATING --

Today's decision to confirm Infinis's B1 CFR positively reflects, (1) the group's market position as a leading renewable electricity generator in the UK; (2) the relatively stable and predictable nature of the group's principal renewable energy support mechanisms, controlled by the UK Government, under which all of the group's assets operate; and (3) its low marginal cost generating fleet, which provides consistent load factors.

However, the rating is constrained by (1) the group's small scale relative to peers rated using Moody's Unregulated Utilities and Unregulated Power Companies methodology; (2) reduced predictability about some elements of future revenues under the current government, as exemplified by the decision in the Summer Budget to remove the exemption for Renewable Source energy from the Climate Change Levy (CCL) tax; (3) the reliance on declining landfill gas reserves, which would be accentuated following the planned disposal of wind assets; and (4) the material level of planned debt-funded capital expenditure to fund the onshore wind investment programme, which will mean that the level of leverage is likely to remain high in the short term (until the wind assets are divested).

WHAT COULD CHANGE THE RATING UP/DOWN

Given the negative outlook, upwards rating pressure is not anticipated in the medium term.

Assuming that the group maintains its current business mix, the rating outlook is likely to stabilise if Moody's concludes that the financial policy will allow the group to maintain ratios in line with the current guidance of debt to EBITDA remaining sustainably below 6.0x and Funds From Operations (FFO) / debt above 10% on a consolidated group basis. Conversely, Moody's could downgrade the ratings if debt to EBITDA were to increase above 6.0x, or FFO / debt were to fall persistently below 10%. Separation of the landfill gas and wind businesses would, however, result in negative ratings pressure and Moody's ratio guidance would be reviewed in such circumstances given the business profile of the surviving business.

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Unregulated Utilities and Unregulated Power Companies published in October 2014. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

Infinis Energy Plc, based in Northampton, UK, is a holding company focused on electricity generation from renewable sources. The company is owned by funds managed by private equity group Terra Firma. As at 30 September 2015, the Infinis Energy Plc group had 585 megawatts (MW) of generation capacity. The landfill gas business accounts for 311MW (53%) while the onshore wind business accounts for 274MW (or 47%).

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt 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.

Philip Cope
Analyst
Corporate Finance Group
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Neil Griffiths-Lambeth
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Releasing Office:
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's changes outlook on Infinis's B1 ratings to negative; confirms ratings
No Related Data.
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