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Rating action

Scope Ratings has today assigned first-time public ratings to the notes issued by CPPIB Renewables Europe S.à.r.l. as follows:

Senior secured notes, EUR 510.6m: new rating of BBB+

The notes will partially refinance CPPIB’s share in the construction and operation of two offshore wind farms in the German North Sea.

Transaction overview

The project underlying the senior notes is currently the largest offshore wind farm project in Germany. The project comprises two adjacent offshore wind farms: Hohe See (497MW) and Albatros (112MW) in the German North Sea.

The project is sponsored by EnBW, which holds the majority stake (50.1%). Enbridge and Canada Pension Plan Investment Board (CPP Investments) own the remaining 49.9%. Enbridge joined the project as a strategic partner to EnBW in 2017. In 2018, Enbridge secured CPP Investments as a 49.0% co-investor in its renewable energy projects in Europe and North America.

The transaction represents the financing of CPP Investments’ interest in the project by issuing senior secured notes totalling EUR 510.6m. CPP Investments holds an indirect share of 24.45% in both offshore wind farms. CPP Investments will remain exposed to the project through its subordinated investment.

EnBW manages the construction and operation of the wind farms following project commissioning. All 87 wind turbine generators were commissioned in January 2020 and final takeover is expected to occur this year.

Siemens will provide O&M services for the wind turbine generators for the first five operating years after the completion of the offshore wind farms, followed by EnBW for the following (●) years, which Scope considers sufficient.

Rating rationale

The BBB+ rating reflects a total expected loss of 0.69% over the notes’ life until maturity (equivalent to a 6.45-year constant-exposure expected risk horizon). Key drivers are marginal remaining construction risk and low risk during operation, especially with regard to the sponsors and revenue generation. The economic value of cash flows and the extensive experience and strong economic incentives of the sponsors and operators mitigate the risks contributed by the project structure and its financial strength.

Construction risks are negligible and account for only two basis points of total expected loss. Construction is well-advanced and progressing in line with expectations. The comprehensive contractual framework mitigates the remaining risks.

Operational risks contribute 0.15% to total expected loss. The initial five-year service contract and warranty period by Siemens and the strong operating and maintenance agreement by EnBW mitigate risks from operating expenditure uncertainties. Potential counterparty risks regarding the service providers are low because of their long-standing track records, strong market positions, sound credit standing and solid commitment to the project.

Revenue risks account for 0.13% of total expected loss. The priority dispatch of electricity, the absence of price risk due to regulated fixed feed-in tariffs, and the good quality and reliability of the offshore wind resource mitigate the risk of revenue fluctuations. The project’s strong economic rationale, negligible risk of retroactive regulatory change in Germany, and high barriers to entry compensate for the project’s significant dependence on subsidies.

Financial strength risks account for 0.17% of total expected loss. Refinancing risk is low thanks to the relatively small balloon amount (●%). A balloon reserve account, regulated floor prices for seven years after maturity, and the fact that the notes mature at least 10 years before the project life ends further reduce refinancing risk at maturity.

Project structure and compliance risks contribute 0.22% of total expected loss and are an important rating driver. The double subordination of the original CPP Investments stake in the project limits the enforceability of the security package. Nevertheless, investors can rely on the economic value of cash flows and the extensive experience and strong economic incentives of the sponsors and operators (EnBW, Enbridge, and Siemens). The project is a key pillar in EnBW’s renewable energy strategy and forms an integral part of the newly formed strategic partnership between Enbridge and CPP Investments.

Positive key rating drivers

Experienced sponsors. All sponsors are well-experienced, pose low counterparty risks and have high technical capabilities and significant economic incentives.

Marginal construction risks. Construction is well-advanced and progressing in line with expectations. Final takeover for Hohe See and Albatros is expected to occur later this year. The robust contractual framework mitigates remaining construction risks.

Stable and predictable long-term revenues. No price risk due to the fixed feed-in-tariffs until operating-year 20. The good quality and reliability of offshore wind yield in the German North Sea mitigate resource risk.

Low operational risk. Siemens and EnBW will operate and maintain the project for (●) years, which Scope considers sufficient to mitigate operational risk during the debt tenor. The project has strong O&M contracts in place which provide high cost-certainty and mitigate the risks of downtimes and performance issues.

Limited refinancing risk. The notes are almost fully amortising to a small balloon (•%) and mature at least 10 years before the project life ends. The regulated electricity floor-price covering almost two-thirds of the remaining project life, the absence of external debt, and a specific structural element further reduce refinancing risk.

Negative key rating drivers

No step-in rights. Noteholders are subject to a double-minority subordination in decision rights, which limits their ability to take control of the assets and intervene during a restructuring. The sponsors’ strong alignment of incentives with creditors and their proven project management experience partially mitigate this risk.

No debt service reserve at issuer level. There is no dedicated cash reserve in a potential credit impairment event, but default risk is mitigated by the six-month debt service deferral mechanism. The project's stable and predictable cash flows and the senior rank of the notes further mitigate potential losses in an event of prolonged liquidity disruptions.

O&M and maintenance capex risk. Solid long-term service and warranty agreements with experienced counterparties mitigate budget uncertainties regarding operating expenditure.

Significant dependency on subsidies. Low regulatory risks, the strong project rationale, and high barriers to entry mitigate the risk of retroactive subsidy cuts.

Rating-change drivers

Positive. A strong operational track record after an initial ramp-up phase in the short term, or faster deleveraging compared to Scope’s rating case, could result in rating upgrades.

Negative. Lower energy production or significantly lower energy prices after maturity of the financial instrument than assumed under Scope’s rating case could lead to a rating downgrade. These deviations would have to occur over a long time period and be in excess of the significant stresses already considered in Scope’s analysis.

Quantitative analysis and assumptions

The total expected loss on the notes is commensurate with a BBB+ rating. Scope calculated an expected loss of 0.69% over the lifetime of the notes (equivalent to a constant-exposure expected risk horizon of 6.45 years) under Scope’s rating case, which is marginally more conservative than the lenders’ base case scenario. Rating case assumptions include: P90 estimated electricity production, 96% technical availability of the turbines, and annual inflation of 1.0%. In addition, Scope assumed electricity prices to range between the floor price and the low-price secenario produced by an external market consultant (EUR 39/MWh to EUR 43/MWh).

Scope calculated an expected impairment likelihood of 2.58% for this project, which is commensurate with a probability-of-default (PD) strength of bbb when expressed using levels of Scope’s idealised PD curves, part of its methodology. The project’s PD strength and expected loss result from the aggregated risk of the construction and operational phases.

Scope calculated a total expected recovery rate of 73.15% for the project. The total expected recovery rate is the probability-weighted average recovery rate of all 16 credit impairment events under Scope’s project finance rating methodology.

Scope derived detailed estimates of the expected severity of the three credit impairment events that are most relevant for investors. These are: i) Revenue deterioration; ii) Debt repayment or cash flow liquidity issues; and iii) Legal, environmental or compliance issues. These three credit impairment events together contribute 62% of the total expected loss for investors.

Sensitivity analysis

Scope tested the resilience of the rating against deviations of the main input parameters. The rating on the notes is robust, showing limited sensitivity to sizeable changes in analytical assumptions.

• The model-implied ratings would be BB+, or one rating category lower, if: i) all 23 risk factor scores are reduced by one level; or ii) the risk factor scores corresponding to the most relevant risk area are reduced by two levels.
   
• A 25% haircut to the expected recovery rate would result in a rating of BBB (i.e. one notch lower). 

^{1 The sentence with the link was added on 10 March 2020. In the original publication from 13 February 2020, the sentence was not included.}

Confidential information
Scope Ratings has had access to confidential information which cannot be disclosed in the public rating report, despite it being incorporated into the ratings analysis and rating outcome. Scope shows a black dot (●) when a certain piece of information cannot be disclosed because of confidentiality restrictions. Additionally, other confidential information is not mentioned in this press release.

Stress testing
Scope’s project finance methodology considers a rating case that embeds stress when compared to the sponsor’s base case. Additionally, the recovery analysis takes into consideration the extreme events in the recovery distribution curves. These elements can be considered a form of stress testing.
The stresses of the rating case incorporate haircuts to the cash flows for investors using the project’s financial model.
Scope stressed the key inputs to the project’s financial model based on the conditions implied by the respective credit impairment event. For example, the stresses applied to estimate the expected recovery rate in revenue deterioration events cover two key revenue drivers: expected energy yield and park availability. Scope derived the expected recovery rate by calculating the net present value of all cash flows available for debt service under the assumptions of the respective most relevant credit impairment event.

Cash flow analysis
Scope relied on the project’s financial model prepared by Amsterdam Capital Partners for the forecast cash flow analysis of the transaction. The cash flow analysis incorporates Scope’s own assumptions over the economic life of the project, considering the transaction’s main structural features, such as the notes’ priorities of payment, the notes’ size and coupons. The cash flow analysis is used to assess the different risk factors and recovery risk factors considered in Scope’s project finance methodology and does not directly affect the rating process.

Methodology
The methodology used for this rating is the General Project Finance Rating Methodology it is 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.

Solicitation, key sources and quality of information
The sponsor of the transaction and its agents participated in the rating process.
The following substantially material sources of information were used to prepare the credit rating: public domain, the sponsor, the sponsor’s agents, in particular the arranger, third parties and Scope internal sources.
Scope considers the quality of information available to Scope on the 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.
Scope Ratings GmbH has received third-party due diligence assessments. The external due diligence assessments were considered when preparing the rating and they have had no negative impact on the credit rating.
Prior to the issuance of the rating action, the rated entity was given the opportunity to review the rating and the principal grounds on which the credit rating 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 Torsten Schellscheidt, Executive Director
Person responsible for approval of the rating: Carlos Terré, Managing Director
The ratings were first released by Scope on 13 February 2020.

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
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