Approximately $250 million of rated debt affected
New York, May 31, 2018 -- Moody's Investors Service ("Moody's") upgraded
Atlantica Yield plc's (Atlantica or "yieldco") ratings,
including its Corporate Family Rating (CFR) to Ba3 from B1, Probability
of Default rating to Ba3-PD from B1-PD, and senior
unsecured rating to B1 from B2. Atlantica's Speculative Grade
Liquidity (SGL) rating is unchanged at SGL-2. The rating
outlook is positive.
Today's rating action concludes the review of Atlantica's
ratings initiated on April 24, 2018.
RATINGS RATIONALE
"The upgrade of Atlantica's CFR to Ba3 primarily reflects
the yieldco's improved liquidity profile following the execution
of a new $215 million committed credit facility in May 2018"
said Natividad Martel, Vice President-Senior Analyst.
The positive rating action is also prompted by improvements in the operational
performance of the yieldco's South African solar plant Kaxu during
the first quarter of 2018. It further reflects our expectation
that the US Solana project will meet the required output specified under
the engineering, procurement and construction contract that it entered
into with Abengoa S.A. (unrated). Today's rating
action also anticipates the US Department of Energy's (DoE) authorization
for Algonquin Power & Utilities Corp (Algonquin; unrated) to
acquire Abengoa's remaining 16.5% interest in the
yieldco, a credit positive.
The Ba3 CFR reflects the yieldco's new ownership structure and contractual
arrangements with Algonquin, a financially stable sponsor.
These arrangements support our expectation of a sustainable growth strategy
that considers Algonquin's equity commitments, the yieldco's
80% target payout ratio foreseen under a March 2018 shareholders
agreement, and no change to the strong corporate governance arrangements.
The Ba3 CFR also considers Atlantica's access to a pipeline of potential
new assets through separate right of first offer agreements (ROFO) with
Algonquin and, particularly, with Abengoa-Algonquin
Global Energy Solutions B.V. (AAGES), a joint venture
set up as part of the strategic partnership announced by Abengoa S.A.
(unrated) and Algonquin in November 2017.
The Ba3 captures the geographic diversification of Atlantica's assets,
the tenor and visibility of its contracted cash flows, with a remaining
weighted average contracted life of 19 years, as well as the assets'
creditworthy counterparties. This view considers the recent improvement
in the overall counterparty risk exposure of the yieldco's projects.
This also helps to mitigate the yieldco's exposure to developing
markets and foreign exchange risk which is not expected to exceed 7%
of the expected cash available for distribution (CAFD).
The positive outlook reflects our expectation of an improvement in the
yieldco's consolidated financial metrics, including a run
rate consolidated debt to EBITDA below 8.0x and CFO pre-W/C
to debt exceeding 7%, on a sustainable basis. The
positive outlook anticipates that consolidated metrics will improve even
if the pending regulatory review of the remuneration of its Spanish solar
assets reduces, effective in 2020, their underlying 7.4%
"reasonable rate of return". This return is based on
the average 10-year Spanish government bond during the previous
24 months, plus a spread of 300 basis points.
Atlantica estimates that each 100 basis point reduction in this rate of
return would impact its annual CAFD by around EUR18 million. As
a point of reference, this equals around 10% of the mid-point
of management's guidance CAFD provided for 2018 ($170-$190
million). Management has also committed to maintain its net holding
company debt to total CAFD (before debt service) below 3.0x (currently
around 2.3x). Thus, the positive outlook assumes that
any reduction in the CAFD will also result in adjustments to the yieldco's
capital structure, for example, in the lower use of debt to
finance its growth opportunities in order to be able to comply with this
financial target. Our analysis also considers the scheduled amortization
of the project debt ($1.2 billion or around 26% of
the $4.6 billion of project debt currently outstanding between
2018 and 2022). This helps to mitigate the incremental project
debt that will result from the anticipated acquisition of new assets,
and from a credit negative regulatory review of the returns embedded in
the Spanish solar assets.
Liquidity Analysis
Atlantica's Speculative Grade Liquidity rating is unchanged at SGL-2
and the company has good liquidity. This considers the May 2018
execution of a new $215 million revolving credit facility that
is scheduled to expire in December 2021 that, subject to certain
conditions, could be increased to $300 million. This
facility replaces Atlantica's Tranche A term loan (face value:
$125 million) which had $53.8 million outstanding
at the end of March 2018, following the cancellation of the Tranche
B of the revolving credit facility last year. We understand that
the financial covenants embedded in the new credit facility remain the
same, including a maintenance leverage ratio of holding company
debt to CAFD of 5.0 x before debt service and a debt service coverage
ratio of CAFD to debt service payments of 2.0x. We anticipate
that the yieldco will be able to continue to comfortably comply with these
financial covenants. Our assessment also anticipates that the yieldco
will initiate the process of refinancing its $255 million of outstanding
unsecured Notes well before their maturity date in November 2019,
while its EUR 275 million senior secured notes issued last year will mature
in 2022, 2023 and 2024.
The SGL-2 also acknowledges management's prudent dividend
policy since 2016 which has allowed the yieldco to fully fund all of its
capital requirements that approximate $50 million (including interest
payments of around $33 million) and report a corporate cash balance
of $151.4 million at end of March 2018 (year-end
2017: $148.5 million). Management's 2018
guidance includes CAFD that is expected to range between $170 and
$190 million. As a point of reference the CAFD in 2017 and
2016 aggregated $170.6 million and $171.2
million, respectively, and included some extraordinary items.
Factors that could lead to an upgrade
An upgrade of the yieldco's ratings is possible if (i) consolidated
financial performance improves as anticipated, including a run-rate
debt to EBITDA below 8.0x and CFO pre-W/C to debt exceeding
7%, on a sustainable basis, and (ii) Algonquin completes
the acquisition of Abengoa's remaining 16.5% interest
stake in the yieldco with Solana meeting its specified project output.
Factors that could lead to a downgrade
A stabilization of the outlook and/or a downgrade of the ratings is possible
if Atlantica's leverage remains higher than currently anticipated.
Specifically, if the yieldco's run rate consolidated debt
to EBITDA, exceeds 8.5x and CFO pre-W/C to debt remain
below 6%, on a sustained basis. Other factors that
could cause a stabilization of the outlook and/or downgrade of the ratings
include a weak assets' operating performance, including Solana
inability to meet its specified project output, that causes material
amounts of cash to be trapped and/or challenges for Abengoa to fully exit
the yieldco's ownership-structure and/or a growth strategy
or dividend policy that are more aggressive than anticipated. A
downgrade is also likely if the yieldco is not able to refinance the Notes
due in November 2019.
Upgrades:
..Issuer: Atlantica Yield plc
.... Probability of Default Rating,
Upgraded to Ba3-PD from B1-PD
.... Corporate Family Rating, Upgraded
to Ba3 from B1
....Senior Unsecured Regular Bond/Debenture,
Upgraded to B1(LGD5) from B2(LGD5)
Outlook Actions:
..Issuer: Atlantica Yield plc
....Outlook, Changed To Postive From
Rating Under Review
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.
Atlantica Yield plc is a total return company which owns a diversified
portfolio of contracted assets in solar, wind, natural gas
power generation, electric transmission and water in North America,
South America and certain markets in EMEA. In November 2017,
Algonquin (unrated) and Abengoa (unrated) announced a strategic partnership
which included setting up a joint venture to develop global contracted
infrastructure projects, Abengoa-Algonquin Global Energy
Solutions B.V. (AAGES), as well as the sale of Abengoa's
41.5% interest stake in Atlantica. In March 2018,
Atlantica executed separate right of first offer agreements with AAGES
and Algonquin while Algonquin completed the acquisition of the initial
25% interest stake in the yieldco. It also recently exercised
the purchase option for the additional 16.5% stake.
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.
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
Jim Hempstead
MD - Utilities
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
