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      Scope affirms and publishes Encavis’ BBB-/Stable/S-2 issuer rating
      MONDAY, 18/03/2019 - Scope Ratings GmbH
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      Scope affirms and publishes Encavis’ BBB-/Stable/S-2 issuer rating

      The issuer rating reflects Scope Ratings’ view on Encavis’ protected business model, continuously improving diversification and high leverage which however is strongly driven by non-recourse debt on the project level.

      The latest information on the rating, including rating reports and related methodologies are available on this LINK.

      Rating action

      Scope affirms and publishes its BBB-/Stable issuer rating on Encavis AG and its debt-issuing subsidiary Encavis Finance BV. The short-term rating is affirmed at S-2. Senior unsecured debt is affirmed at BBB-. Contractually subordinated debt which fulfils Scope’s criteria for hybrid debt is affirmed at BB.

      Rating rationale

      Encavis issuer rating benefits from Scope’s view on the company’s protected business risk profile bolstered by the prioritised feed-in of generated electricity under availability-based remuneration schemes for an extended time horizon as well as the already achieved diversification of its power generation fleet. The rating is partly constrained by the weaker financial risk profile as measured by the high leverage and comparatively modest debt protection (interest coverage). However, Scope regards the large exposure to non-recourse debt on the project level, sound liquidity measures and the company’s financial policy to partly offsetting the rating constraining impact of the weaker financial risk profile.

      The rating is driven positively by the following:

      • No project developments, only active in acquiring ‘ready to build’ or ‘up and running’ power plants
      • Prioritised feed-in under guaranteed tariffs for most of the power generation portfolio, with an average remaining feed-in period of 15 years with the option to extend power plant lifetimes
      • The company being one of the largest European independent power producer, with a total capacity of almost 2 GW across more than 200 sites
      • Sound asset diversification across mature European renewable energy markets and assets, with further diversification from the investment pipeline
      • Financing through secured non-recourse project loans
      • Sound liquidity
      • Risk mitigation via extensive insurance coverage and the prudent operation and maintenance of project sites

      However, the following aspects limit the rating:

      • High leverage levels including non-recourse debt
      • Low interest coverage (3-4x)
      • The potential dilution of margins through future capacity additions (depending on acquisition prices and negotiated PPAs), albeit remaining above 70% (EBITDA margin)
      • Potential reputational damage upon the default of a project SPV, mitigated somewhat by i) covenants on debt service coverage ratios and cash reserves; and ii) the company’s willingness to provide liquidity to SPVs when needed

      Debt instrument ratings

      Senior unsecured debt is rated at the level of the issuer. Contractually subordinated debt (convertible hybrid bond; ISIN: DE000A19NPE8), whose interest can be deferred under certain conditions, is rated BB, two notches lower than the issuer’s rating.

      Rating-change drivers

      The Outlook is Stable and incorporates Scope’s expectation that Encavis will keep its EBITDA cash interest coverage above 3.0x in the medium term. Furthermore, Scope believes that the company will continue to expand through the acquisition of additional renewable energy power plants and also pay out steadily increasing dividends, leaving free and discretionary cash flows at breakeven. Moreover, our outlook incorporates the assumption that Encavis will provide financial support in case one of the many project SPVs faces some liquidity constraint or breaches financial covenants in order to avoid reputational damages for the whole group.

      Scope would consider a negative rating action if EBITDA cash interest coverage were to deteriorate to less than 2.75x as a result of declining operating cash flows due to major operational disruptions or an increased burden from rising interests on new loans.

      A positive rating action could be warranted if Encavis further improved its business risk profile with an even more granular power generation portfolio and strengthened its financial risk profile as reflected by improved EBITDA cash interest coverage of above 4.0x on a sustained basis.

      Stress testing & cash flow analysis
      No stress testing was performed. Scope performed its standard cash flow forecasting for the company.

      Methodology
      The methodologies used for this rating and rating outlook (Corporate Rating Methodology, Feb 2019; Renewable Energy Rating Methodology, Jan 2019) are available on www.scoperatings.com.
      Historical default rates of the entities rated by Scope Ratings can be viewed in the rating performance report on https://www.scoperatings.com/#governance-and-policies/regulatory-ESMA Please also refer to the central platform (CEREP) of the European Securities and Markets Authority (ESMA): http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml. A comprehensive clarification of Scope’s definitions of default and rating notations can be found at https://www.scoperatings.com/#governance-and-policies/rating-scale.
      The rating outlook indicates the most likely direction of the rating if the rating were to change within the next 12 to 18 months.

      Solicitation, key sources and quality of information
      The rated entity and/or its agents participated in the rating process.
      The following substantially material sources of information were used to prepare the credit rating: public domain, the rated entity, third parties and Scope internal sources.
      Scope considers the quality of information available to Scope on the rated entity or instrument to be satisfactory. The information and data supporting Scope’s ratings originate from sources Scope considers to be reliable and accurate. Scope does not, however, independently verify the reliability and accuracy of the information and data.
      Prior to the issuance of the rating or outlook action, the rated entity was given the opportunity to review the rating and/or outlook and the principal grounds on which the credit rating and/or outlook is based. Following that review, the rating was not amended before being issued.

      Regulatory disclosures
      This credit rating and/or rating outlook is issued by Scope Ratings GmbH.
      Lead analyst Sebastian Zank, Executive Director
      Person responsible for approval of the rating: Werner Stäblein, Executive Director
      The ratings/outlooks were first released by Scope on 5 March 2018. The ratings/outlooks were last updated on 12 February 2019.

      Potential conflicts
      Please see www.scoperatings.com for a list of potential conflicts of interest related to the issuance of credit ratings.

      Conditions of use / exclusion of liability
      © 2019 Scope SE & Co. KGaA and all its subsidiaries including Scope Ratings GmbH, Scope Analysis GmbH, Scope Investor Services GmbH and Scope Risk Solutions GmbH (collectively, Scope). All rights reserved. The information and data supporting Scope’s ratings, rating reports, rating opinions and related research and credit opinions originate from sources Scope considers to be reliable and accurate. Scope does not, however, independently verify the reliability and accuracy of the information and data. Scope’s ratings, rating reports, rating opinions, or related research and credit opinions are provided ‘as is’ without any representation or warranty of any kind. In no circumstance shall Scope or its directors, officers, employees and other representatives be liable to any party for any direct, indirect, incidental or other damages, expenses of any kind, or losses arising from any use of Scope’s ratings, rating reports, rating opinions, related research or credit opinions. Ratings and other related credit opinions issued by Scope are, and have to be viewed by any party as, opinions on relative credit risk and not a statement of fact or recommendation to purchase, hold or sell securities. Past performance does not necessarily predict future results. Any report issued by Scope is not a prospectus or similar document related to a debt security or issuing entity. Scope issues credit ratings and related research and opinions with the understanding and expectation that parties using them will assess independently the suitability of each security for investment or transaction purposes. Scope’s credit ratings address relative credit risk, they do not address other risks such as market, liquidity, legal, or volatility. The information and data included herein is protected by copyright and other laws. To reproduce, transmit, transfer, disseminate, translate, resell, or store for subsequent use for any such purpose the information and data contained herein, contact Scope Ratings GmbH at Lennéstraße 5 D-10785 Berlin.

      Scope Ratings GmbH, Lennéstraße 5, 10785 Berlin, District Court for Berlin (Charlottenburg) HRB 192993 B, Managing Directors: Torsten Hinrichs and Guillaume Jolivet.
       

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