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Rating Action:

Moody's downgrades Infinis's CFR to B3; affirms B1 rating on notes

12 Oct 2016

London, 12 October 2016 -- Moody's Investors Service, (Moody's) has today downgraded to B3 from B1 the corporate family rating (CFR) of Infinis Energy Limited (Infinis). Concurrently, Moody's has downgraded Infinis's probability of default rating (PDR) to B3-PD from Ba3-PD. Finally, Moody's has affirmed the B1 rating on the GBP350 million unsecured notes due 2019 issued by the group's landfill gas generation business, Infinis Plc, and changed the LGD assessment to LGD3 from LGD4. The outlook on all ratings remains negative.

RATINGS RATIONALE

RATIONALE FOR DOWNGRADE OF CFR

The downgrade of Infinis's CFR and PDR reflects (1) that the consolidated group's leverage has been significantly above guidance for the previous rating level since February 2016 (debt / EBITDA was 6.7x at 31 March 2016); and (2) the lack of demonstrable progress on the sale of one or both of the group's two businesses (landfill gas and onshore wind), which entails that leverage could remain high for longer than previously expected. Although separate sales processes are underway, Moody's believes that there is significant uncertainty over the timing of the transaction(s) being concluded.

The revised B3 CFR and B3-PD rating also reflect that the group has insufficient liquidity to continue as a going concern beyond 28 December 2016 and the maturity of a GBP205 million bridge facility at the Infinis group level, for which a three month extension option has recently been exercised. This reflects that the group's cash and cash equivalents balance at end September 2016 is only around GBP90 million, of which Moody's estimate only GBP50 million is accessible - with the residual trapped in the ring-fenced landfill gas business even after all permitted carve-outs are utilised. Moody's considers that whilst both businesses should have positive equity value, it is likely that only a sale of the wind operations, in isolation, before the end of December 2016 would meet the group's liquidity shortfall unless the current bridge facility is further extended or replaced.

The bridge facility was entered into in December 2015 to finance the group's immediate parent, Monterey Capital II S.à.r.l (Monterey), acquisition of the remaining share capital they did not already own in December 2015 (31.5% for c. GBP175 million excluding transaction costs and associated fees). This facility was pushed down to the level of the Infinis group when it was novated from Monterrey to Infinis Capital Limited in February 2016, increasing the group's consolidated leverage by over 30%. In addition, the terms of the bridge facility required the group's GBP50 million revolving credit facility (RCF) to be fully repaid and wound up, removing an external source of liquidity for the group.

Infinis's B3 CFR also 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 almost all of the group's output is sold under; 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 under Moody's Unregulated Utilities and Unregulated Power Companies methodology; (2) reduced predictability about some elements of future revenues, e.g. embedded benefits; (3) the reliance on declining landfill gas reserves, which would be accentuated in case of a disposal of the wind assets; and (4) a high level of leverage as discussed above.

RATIONALE FOR AFFIRMATION OF B1 RATING ON NOTES

The affirmation of the B1 rating on the notes, with LGD assessment of LGD3, issued by Infinis Plc principally reflects the position of the landfill gas business within the group structure, in particular the ring-fenced structure around the business. If all the covenants and permitted carve-outs allowed under the bond indenture are exercised in Q3 FY2017 to upstream cash to the Infinis group to help manage their liquidity shortfall, Moody's estimates Infinis Plc's net debt / EBITDA would increase from just over 3.0x at 30 June 2016 to over 3.5x resulting in a materially weaker financial profile. There is no mandatory redemption of the notes on change of control if net debt to EBITDA is below 3.5x.

RATIONALE FOR THE NEGATIVE OUTLOOK

The negative outlook reflects (1) execution risk around extending the bridge facility and/or achieving sales of the onshore wind and/or landfill gas businesses before year-end 2016; and (2) lack of clarity regarding the group's future financial policy.

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 could be stabilized if the group (1) puts in place sustainable liquidity arrangements; and (2) adopts a financial policy that will allow the group to maintain ratios in line with the current guidance of debt to EBITDA trending below 7.5x.

Conversely, Moody's could downgrade the ratings if no new liquidity arrangements were put in place or this ratio guidance would not be met.

Finally, separation of the landfill gas and wind businesses could result in a higher business risk profile and Moody's ratio guidance could be reviewed in such circumstances given the business profile of the surviving business.

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

Infinis Energy Limited, 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 31 March 2016, the Infinis Energy Limited group had 618 megawatts (MW) of generation capacity. The landfill gas business accounts for 301MW (49%) while the onshore wind business accounts for 317MW (or 51%).

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
Infrastructure 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

Paul Marty
VP - Senior Credit Officer
Infrastructure 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

No Related Data.
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