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Rating action

Scope Ratings GmbH (Scope) has today affirmed its BBB-/Stable issuer rating on Encavis AG and its financing subsidiary Encavis Finance BV. Concurrently, Scope has affirmed the long-term ratings for senior unsecured debt at BBB-, subordinated (hybrid) debt at BB and short-term debt at S-2.

Rating rationale

Encavis BBB- rating primarily reflects the company’s largely protected position as an independent power producer with the operation of a generation portfolio that comprises about 3 GW in more than 250 renewable energy power plants (wind and solar) across Western Europe (ESG factor: credit-positive environmental risk factor). Scope regards Encavis’ business model as widely protected because the vast majority of generation assets benefit from the prioritised feed-in of generated electricity under availability-based remuneration schemes. Merchant risk for unregulated power plants is widely hedged through long-term power purchase agreements with creditworthy counterparties. Despite some regulatory risk, as recently evidenced by retroactive tariff cuts for some of Encavis’ solar assets in France, the company’s granular power generation portfolio ensures robust cash flow generation.

Although weather effects can cause some cash flow volatility, Scope expects such effects to be increasingly softened by the ongoing portfolio ramp-up, paired with the rising granularity of power plant sites going forward, which will limit the incremental effects from single generation sites due to adverse weather or tariff/price adjustments. As such, Scope believes that Encavis will be able to retain a strong margin, e.g. an EBITDA margin of above 70%, and solid cash flow conversion.

Based on the company’s internal funding power, Scope expects the portfolio ramp-up to be widely covered by operating cash flow. At the same time, the closure of a new EUR 125m ESG-linked multi-year revolving credit facility is expected to accelerate expansion as part of Encavis’ ‘Fast Forward 2025’ growth strategy, which targets growing the owned generation portfolio to 3.4 GW by 2025 (compared to around 1.8 GW as of June 2021). The rise in financial shooting power should enable the company to make opportunistic bolt-on acquisitions of up-and-running renewable energy power plants and invest in ready-to-build power plants, partly sources from the 3 GW project pipeline of its numerous project development partners.

Scope continues to see Encavis’ financial risk profile as a rating constraint. Nonetheless, the agency recognises the company’s gradually improving credit profile and widened headroom to a potential negative rating action. This is based on: i) improving leverage, which is bolstered by the envisioned full conversion of the EUR 150m hybrid convertible into equity (Scope accounted for 50% of this exposure as debt); ii) anticipated operating growth, which is expected to result in EBITDA growing faster than the company’s net interest burden; and iii) Scope’s expectation that discretionary cash flow will remain positive or around breakeven, with net capex and shareholder remuneration (including scrip dividends) widely covered by the operating business. These trends are likely to result in a leverage – as measured by Scope-adjusted debt/EBITDA – of below 7x by YE 2021 (around 1x excluding non-recourse project debt) and EBITDA interest coverage trending at around 4.0x. Nonetheless, leverage will remain high at above 6x, primarily driven by the large exposure to non-recourse debt at the level of project companies, which makes up around 75% of Encavis’ total exposure to financial debt.

Scope’s updated forecasts for 2021E-23E signal increased headroom for the company’s EBITDA against the agency’s negative rating-change driver. EBITDA would need to come in 35%-55% lower than forecasted before it reached an EBITDA interest cover of 2.75x, which is the defined trigger for ratings pressure.

Scope expects credit metrics to remain robust in light of Encavis’ financial policy, which the agency believes will help the company maintain its financial risk profile alongside an acquisitive growth strategy. Scope is convinced that Encavis will balance expansion with maintaining the quality of its financial risk profile. This is evidenced by the company’s funding measures, such as the use of equity-like financing instruments, the offering of scrip dividends, the wide use of financial covenants and cash reserves at project level as well as moderate dividend growth and a minimum equity ratio of 24%.

The company’s liquidity remains very robust despite its high leverage. Besides the aggregated debt associated with amortising non-recourse project finance debt (EUR 120-130m p.a.), Encavis has little exposure to maturing debt on the holding level (basically just lease obligations, amortising shareholder loans and Schuldschein debt over the next two years, totalling around EUR 20-30m amortising every year). Scope assumes that amortising loans on the project level can sufficiently be covered by the project companies’ operating cash flows. This is also backed by a significant amount of cash reserves at the project SPVs (aggregated amount of EUR 62.5m as of June 2021). Furthermore, the agency assumes that the company would be likely to inject cash into an SPV, e.g. via a shareholder loan or an equity injection, if a liquidity constraint arises on the project level.

Liquidity ratios are expected to stand comfortably above 110% at all times, supported by the large unrestricted cash cushion of EUR 177m at the end of June 2021 and committed long-term credit lines of EUR 125m. Ultimately, Scope believes that Encavis has demonstrated a diversified approach to external funding, including bank and capital market financing on the project level as well as private debt (shareholder loans and Schuldschein debt) and public debt on the group level, which should support external funding if needed.

Outlook and rating-change drivers

The rating Outlook remains Stable and incorporates Scope’s expectation that EBITDA interest coverage will trend towards 4.0x over the next few years. Scope also believes Encavis will continue to acquire renewable energy power plants and keep increasing dividends, leaving free and discretionary cash flows at around breakeven. Moreover, the rating Outlook assumes that Encavis will provide financial support to a project SPV if needed to prevent reputational damage spreading to the whole group.

A positive rating action could be warranted if Encavis strengthened EBITDA interest coverage to above 4.0x on a sustained basis, together with further improvements in the granularity of its power generation portfolio.

Scope would consider a negative rating action if EBITDA/cash interest coverage fell below 2.75x, e.g. as a result of lower operating cash flows due to major operational disruptions or rising interest rates on new loans. In light of the expected gradual improvement in EBITDA interest cover but also improved leverage to below 7x (SaD/EBITDA), Encavis has gained substantial headroom to such a negative action.

Long-term and short-term debt ratings

Senior unsecured debt remains rated at the level of the issuer rating.

Contractually subordinated debt is affirmed at BB, two notches lower than the issuer rating. Scope notes that Encavis’ only outstanding debt position under this rating category, namely the EUR 150m hybrid convertible bond, will be redeemed by conversion into equity on 4 Oct 2021.

The short-term debt rating is affirmed at S-2. This reflects Encavis’ sustained robust liquidity and its diversified exposure to external funding channels, i.e. from banks and capital markets at project level and from private sources (i.e. shareholder loans and Schuldschein debt) and public sources at group level.

One or more key drivers for the credit rating action are considered ESG factors.

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

Methodology
The methodologies used for these Credit Ratings and/or Outlooks, (Corporate Rating Methodology, 6 July 2021; Rating Methodology: European Renewable Energy Corporates, 18 January 2021), are available on https://www.scoperatings.com/#!methodology/list.
Scope Ratings GmbH and Scope Ratings UK Limited apply the same methodologies/models and key rating assumptions for their credit rating services, while Scope Hamburg GmbH’s methodologies/models and key rating assumptions are different from those of Scope Ratings GmbH and Scope Ratings UK Limited.
Information on the meaning of each Credit Rating category, including definitions of default, recoveries, Outlooks and Under Review, can be viewed in ‘Rating Definitions – Credit Ratings, Ancillary and Other Services’, published on https://www.scoperatings.com/#!governance-and-policies/rating-scale. Historical default rates of the entities rated by Scope Ratings can be viewed in the Credit Rating performance report at https://www.scoperatings.com/#governance-and-policies/regulatory-ESMA. 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 Ratings’ definitions of default and Credit Rating notations can be found at https://www.scoperatings.com/#governance-and-policies/rating-scale. Guidance and information on how environmental, social or governance factors (ESG factors) are incorporated into the Credit Rating can be found in the respective sections of the methodologies or guidance documents provided on https://www.scoperatings.com/#!methodology/list.
The Outlook indicates the most likely direction of the Credit Ratings if the Credit Ratings were to change within the next 12 to 18 months.

Solicitation, key sources and quality of information
The Rated Entity and/or its Related Third Parties participated in the Credit Rating process.
The following substantially material sources of information were used to prepare the Credit Ratings: public domain, the Rated Entity and Scope Ratings' internal sources.
Scope Ratings considers the quality of information available to Scope Ratings on the Rated Entity or instrument to be satisfactory. The information and data supporting the Credit Ratings originate from sources Scope Ratings considers to be reliable and accurate. Scope Ratings does not, however, independently verify the reliability and accuracy of the information and data. Prior to the issuance of the Credit Rating action, the Rated Entity was given the opportunity to review the Credit Ratings and/or Outlooks and the principal grounds on which the Credit Ratings and/or Outlooks are based. Following that review, the Credit Ratings were not amended before being issued.

Regulatory disclosures
These Credit Ratings and/or Outlooks are issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0. The Credit Ratings and/or Outlooks are UK-endorsed.
Lead analyst: Sebastian Zank, Executive Director
Person responsible for approval of the Credit Ratings: Philipp Wass, Executive Director
The Credit Ratings/Outlooks were first released by Scope Ratings on 5 March 2018. The Credit Ratings/Outlooks were last updated on 1 October 2020.

Potential conflicts
See www.scoperatings.com under Governance & Policies/EU Regulation/Disclosures for a list of potential conflicts of interest related to the issuance of Credit Ratings.

Conditions of use/exclusion of liability
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