S&P Global Ratings assigned its ‘BB-’ issue-level rating and ’3′ recovery rating to Pattern Energy Operations L.P.’s (Pattern Operations) senior unsecured notes due 2028. The ’3′ recovery rating indicates its expectation that lenders would receive meaningful (50%-70%; rounded estimate: 50%) recovery in the event of a default.
At the same time, S&P is affirming its ‘BB-’ issuer credit rating on Pattern Operations.
S&P affirmed its issuer credit rating on Pattern Operations following its issuance of $700 million of senior unsecured notes. The company intends to use the net proceeds from the offering to redeem all of its outstanding $350 million senior unsecured notes due 2024 and pay down its outstanding $250 million bank loan and $4 million of convertible notes due 2020. Though Pattern Operations’ net leverage increases with the debt offering, it is not significant enough to weaken its creditworthiness.
Since being acquired and taken private by Canada Pension Plan Investment Board (CPPIB) in 2020, the company has continued to operate a geographically diverse portfolio of primarily wind power generation assets that generate stable cash flow from long-term contracts with highly rated counterparties. However, given the organizational structure implemented as part of the take-private transaction, with common ownership across developmental and operational platforms, S&P continues to view the creditworthiness of the consolidated enterprise as a key consideration in its analysis.
S&P expects 2020 to be a transformational year for Pattern Operations because the company will fully transition into a privately held enterprise. The rating agency acknowledges some uncertainty in its forecasts and views 2020 as an anomaly due to the unprecedented stay-at-home and business closures implemented in response to the COVID-19 pandemic. Consequently, S&P places greater emphasis on its fiscal year 2021 and 2022 projections given that they more accurately capture the company’s cash generation profile. Furthermore, S&P’s analysis and metrics assume no incremental debt or financial obligations at Pattern Energy Group L.P. (HoldCo) or any recourse debt at either of the developmental entities Pattern Energy Holdings Group 2 L.P. (DevCo) or Green Power Investments Corp. (GPI).
“The stable outlook reflects our view that Pattern Operations’ assets will continue to operate under long-term contracts with investment-grade counterparties and generate fairly predictable cash flows to support the servicing of its holding company debt obligations,” S&P said.
In its base-case scenario, S&P forecasts a weighted average funds from operations (FFO)-to-debt ratio of between 13% and 16% and a debt-to-EBITDA ratio of between 5.0x and 5.5x over its forecast period.
“We could lower our rating on Pattern Operations if its consolidated FFO-to-debt ratio trends below 13% and remains at that level for a protracted period. This could occur if its projects underperform due to resource or operational risks or if it receives materially less distributions from its projects for any other reason,” S&P said.
“We would consider taking a positive rating action on Pattern Operations if its consolidated FFO-to-debt ratio improves and remains above 20%. This would most likely occur if the company reduces its consolidated leverage by increasing the cash flows from its existing or new projects without a commensurate increase in its debt,” the rating agency said.