New York, February 24, 2016 -- Moody's Investors Service, ("Moody's") today
downgraded the Corporate Family Rating (CFR) of TerraForm Power Operating
LLC (TPO) and TerraForm Global Operating LLC (TGO) to B3 from B2.
The unsecured debt rating at both TPO and TGO were downgraded to Caa1
from B3, and the Probability of Default rating at both TPO and TGO
were downgraded to B3-PD from B2-PD. The Speculative
Grade Liquidity (SGL) rating of TPO was lowered to SGL-4 and the
SGL of TGO was maintained at SGL-3. The rating outlook of
both entities is negative. TPO and TGO are subsidiaries of TerraForm
Power Inc (TERP) and TerraForm Global Inc (GLBL), respectively,
which are the publicly listed YieldCos and subsidiaries of sponsor SunEdison
Inc (SUNE, unrated).
Downgrades:
..Issuer: TerraForm Global Operating, LLC
.... Probability of Default Rating,
Downgraded to B3-PD from B2-PD
.... Corporate Family Rating, Downgraded
to B3 from B2
....Senior Unsecured Regular Bond/Debenture,
Downgraded to Caa1 (LGD 5) from B3 (LGD4)
....
..Issuer: TerraForm Power Operating LLC
.... Probability of Default Rating,
Downgraded to B3-PD from B2-PD
.... Speculative Grade Liquidity Rating,
Downgraded to SGL-4 from SGL-3
.... Corporate Family Rating, Downgraded
to B3 from B2
....Senior Unsecured Regular Bond/Debenture,
Downgraded to Caa1 (LGD 5) from B3 (LGD 5)
Outlook Actions:
..Issuer: TerraForm Global Operating, LLC
....Outlook, Remains Negative
..Issuer: TerraForm Power Operating LLC
....Outlook, Remains Negative
Affirmations:
..Issuer: TerraForm Global Operating, LLC
.... Speculative Grade Liquidity Rating,
Affirmed SGL-3
RATINGS RATIONALE
Rating Rationale
"Our rating action reflects heightened concerns around the solvency
of SunEdison as well as liquidity considerations at the yieldcos,
with TERP likely needing additional capital in 2016 to meet obligations
under the Vivint asset purchase commitment agreement", said
Swami Venkataraman, Moody's Vice President -- Senior
Credit Officer. "In our opinion, both TERP and GLBL
exhibit stronger credit quality than parent SUNE because their cash flows
remain stable. However, our rating incorporates a low but
not negligible probability that one or both yieldcos may eventually end
up in bankruptcy proceedings as a result of a SUNE bankruptcy",
he added.
We believe that the fundamental credit quality of both TERP and GLBL has
been weakened as they have not been able to terminate or otherwise eliminate
certain of their financial obligations. In TERP's case,
while the ultimate obligation to purchase the Invenergy assets always
resided with TERP, the initial plan called for SUNE to own a part
of the portfolio in a warehouse and for the assets to be dropped into
TERP over time. SUNE's inability to raise capital resulted
in TERP purchasing all of the assets in 2015.. In addition,
TERP signed an amended "purchase commitment" that reduced
its prior obligation but will potentially still require it to purchase
400-450 MW of rooftop systems from Vivint annually for up to five
years. This obligation, along with the requirement to purchase
other assets from SUNE, will require TERP to incur additional non-recourse
debt, sell assets or access the capital markets in 2016 as its liquidity
is limited, although the obligations would fall away if SUNE is
successful in selling these assets to third-parties. We
estimate that TERP will need to draw down a substantial all of its $725
million revolver, accounting for the downgrade of its SGL rating
to SGL-4 from SGL-3. Proforma for the Invenergy acquisition
that closed in Dec 2015, we estimate that TERP's Debt/EBITDA
stands at about 6.9x, and cash flow coverage of interest
and debt at 2.57x and 8.5%, respectively.
In our opinion GLBL has also stepped up to support SUNE, with SUNE
selling it 425 MW of solar projects in India. GLBL pre-paid
$231 million for these assets in Q4 2015, with an adjustment
to the price paid to be made as the projects are completed and transferred
in 2016. GLBL is yet to complete four of its originally planned
acquisitions (under construction or pending project lender or governmental
approvals) and one planned acquisition has been terminated by SUNE.
As a result the company did not need external capital to complete the
Indian solar acquisition and we estimate still has approximately $800
million of cash balances as of Dec 31, 2015 and full availability
of its $485 million revolving credit facility, leading us
to keep GLBL's SGL rating unchanged at SGL-3.
On January 7, 2016, when SUNE completed its $725 million
second lien debt and exchange offer, the company disclosed that
it had $1.1 billion of cash on hand proforma for the debt
issuance. We estimate that about $500 million of this amount
likely resides at various projects currently under construction and a
majority of this amount is not really free cash available to meet liquidity
needs. A portion of this cashincludes EPC profits retained temporarily
at the projects by SUNE, which normally acts as the EPC contractor
for all the projects it develops, and which we believe is likely
available for general liquidity if needed. SUNE has about $200
million in interest payments and approximately $600 million in
G&A expenses for 2016. Even if one assumes $200 million
of EBITDA at SUNE's services business as forecasted by the company,
this leaves SUNE dependent upon sales of developed assets to maintain
its solvency.
SUNE's challenging financial position and heightened bankruptcy
risk also contributed to the downgrade since it raises the possibility,
although unlikely, that the yieldcos may be pulled into a SUNE bankruptcy.
When SUNE added independent directors to the board in November 2015,
the CEO and the CFO of both TERP and GLBL were replaced and two former
independent directors resigned, in our opinion it strengthened each
yieldco's connection with SUNE rather than reinforcing their independence.
The new Chairman of both yieldcos was a director on SUNE's board,
and the CEO also acts as SUNE's CFO. The current board of
both yieldcos consists of 4 independent directors and 3 representatives
from SUNE. SUNE's ability to sell assets to the yieldcos
also illustrates this increasingly close relationship.
The yieldcos will face collateral consequences from a SUNE bankruptcy
and at some point, it is possible that their boards may need to
make an independent decision as to whether the yieldcos themselves may
need to be filed into bankruptcy. In our view, there are
a number of factors that reduce the risk of a voluntary bankruptcy filing
by TERP or GLBL including: (i) The companies are currently able
to meet all of their obligations and are not themselves insolvent;
(ii) SUNE only has a minority economic interest in both yieldcos,
though it controls both companies through class B shares; (iii) Both
TERP and GLBL are publicly listed Delaware corporations rather than wholly
owned SPVs and Delaware law imposes fiduciary duties on a company's
directors; and (iv) a voluntary filing of either yieldco requires
a vote of a majority of three independent directors on the yieldco's
"corporate governance and conflicts committee".
The assets and cash flows of the yieldcos would only be available to SUNE's
creditors in case of a SUNE bankruptcy if a substantive consolidation
of the yieldcos into a SUNE bankruptcy were ordered by a bankruptcy judge.
Although we consider the likelihood of this event to be remote,
since all three companies have operated as clearly separate legal entities
with their own boards, capital structures and financing documents,
it is not impossible that a bankruptcy court might reach a different result.
At the time of the original ratings of TERP and GLBL, Moody's
was also provided with non-consolidation opinions from an external
counsel.
Liquidity
TPO has an SGL-4 rating while TGO has an SGL-3 rating.
We project TERP'S liquidity is weaker because of our expectation
that they will draw substantially all of their revolver while we project
that TGO has approximately $800 million of cash balances and full
availability of its $485 million revolving credit facility.
TERP's liquidity is also affected by its need to raise additional
capital in relation to Vivint related asset purchase obligations should
that acquisition close.
Outlook: The negative outlook primarily reflects liquidity and solvency
risks at SUNE and the possibility that TPO and TGO may be drawn into a
SUNE bankruptcy, should it occur.
What could change the rating Up?
Limited near term prospects exist for a rating upgrade. However,
if SUNE is able to either successfully close or terminate the Vivint acquisition,
a stable outlook on TPO and TGO could be considered. This would
also require a high degree of certainty that SUNE will not file for bankruptcy
and is able to successfully continue as a going concern. A stable
outlook would also require that TPO and TGO are not saddled with additional
financial obligations that pressure their financial profiles and that
they continue to maintain adequate liquidity to support their operations
What could change the rating Down?
Ratings at both TPO and TGO could be lowered further if we perceive an
increase in the risk at TPO and TGO from a bankruptcy filing at SUNE.
Moreover, we will assess how recent management changes at SUNE,
TERP and GLBL impact financing plans around the completion of near-term
acquisitions, both yieldcos' strategic direction, SUNE's
liquidity profile and corporate governance practices, especially
how TERP and GLBL's independent directors view and react to ongoing developments.
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.
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.
Swami Venkataraman, CFA
VP - Senior Credit Officer
Infrastructure Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
William L. Hess
MD - Utilities
Infrastructure Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Moody's downgrades TerraForm Power and TerraForm Global to B3 CFR; outlook negative
