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

Rating action

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

Rating rationale

Significant strengthening in credit metrics paired with the company’s gradually improving geographical diversification and granularity of the own portfolio drive the Outlook change to Positive from Stable

The rating affirmation primarily reflects the company’s largely protected position as an independent power producer with own generation portfolio that comprises about 2.0 GW in more than 200 renewable power plants. This is supplemented by about 1.2 GW in around 90 plants operated as part of its asset management for third parties across Western Europe (ESG factor: credit-positive environmental risk factor). 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.

The reopening of economies after the Covid-19 crisis led to higher demand for energy, bolstering power prices which in large parts of Europe depend on prices for carbon and fossil fuels such as natural gas or coal. Reduced gas supplies from Russia resulted in significantly higher gas and power prices in H2 2021. The Russia-Ukraine war has aggravated the European energy crisis, pushing power prices to new highs. Scope expects power prices will decline from their current high, but will remain volatile at elevated levels for a prolonged period.

Encavis’ business model is broadly protected from the exposure to low power prices through prioritised feed-in of generated electricity under availability-based remuneration schemes and long-term power purchase agreements with creditworthy counterparties. At the same time, it benefits from very high power prices through subsidised projects in Germany and the Netherlands, where feed-in tariffs represents a floor price with upside potential, should market prices exceed subsidised prices as well as through exposure to merchant volumes (max. 5% of total). This is already evidenced by strong H1 2022 results with revenue and EBITDA each 40% above prior year figures, while electricity generation grew by 17%. The company also raised the FY2022 guidance and is working on a strategy update as the financial targets set by the ‘Fast Forward 2025’ plan are likely to be achieved earlier than expected.

Prolonged periods of elevated power prices should further support overall performance once short-term hedges are renewed at higher levels. Increasing PPA prices for new projects that more than offset higher development costs and moderately increasing interest rates will also bolster performance. This view is supported by the consistently high demand for renewable power, with current supply levels not remotely able to meet demand.

Scope understands that the current high inflation in Europe does not have a significant impact on Encavis’ business activities at present. As Encavis has avoided best-effort supply agreements, the disruption of global supply chains has not yet affected the operation or completion of wind and solar parks. The escalation of tensions around Taiwan, which together with China is one of the largest suppliers of solar panels and other crucial components for power plants, could represent a major risk for the development of new projects. Scope does not anticipate any downside from this risk factor yet and will treat it as an event risk should it materialise.

Despite recent interest rate increases and further potential interest rate hikes, market rates remain below average of the Encavis’ debt portfolio, which enables the company to refinance its existing debt at improved conditions.

The credit metrics are further supported by the conversion of the EUR 150m hybrid convertible into equity in October 2021 and the subsequent issuance of the new EUR 250m hybrid convertible in November 2021 (Scope accounts for 50% of this exposure as debt). As a result, Scope expects Scope-adjusted EBITDA/interest cover to remain above 4x and Scope-adjusted debt/EBITDA to decrease below 6x (remain below 1x excluding non-recourse project debt) over the next few years.

Scope expects increased risk of regulatory interventions to slow down inflation and to spread the burden of increased energy costs. For example, temporary price caps in Spain have some impact on two large projects in Spain, mainly affecting unhedged electricity sales. As the price cap is well above the levels fixed in PPAs for these projects, it limits the upside potential from high market prices with no downside risk as of yet. The risk of regulatory interventions is largely mitigated by solid and improving geographic diversification, with focus on jurisdictions with relatively stable regulatory environments, as evidenced by recent capacity additions in the Netherlands, Germany and the Nordic countries. This diversification further benefits from the gradually rising granularity of power plant sites going forward as this also softens volatility arising from weather effects.

Liquidity remains adequate. Liquidity ratios are expected to stand comfortably above 110% in the foreseeable future, supported by a large unrestricted cash cushion of EUR 264m at the end of June 2022 and committed long-term credit lines of EUR 145m. Scope assumes that amortising loans on the project level (EUR 120-130m p.a.) can sufficiently be covered by operating cash flow of the project companies. This is also backed by a significant amount of cash reserves at the project SPVs (aggregated amount of EUR 51m as at the end of June 2022). 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.

Scope maintains its neutral view of Encavis’ financial policy, which the agency believes will help the company to 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 flexible dividend policy going forward (including the option of no dividend), 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%.

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

Outlook and rating-change drivers

The Positive Outlook reflects Scope’s expectation that Scope-adjusted EBITDA/interest cover will remain above 4x over the next few years, supported by Encavis’ gradually improving diversification. The rating Outlook also assumes a limited impact on credit metrics from adverse regulatory interventions. Scope believes Encavis will continue to acquire renewable power plants and keep increasing dividends, leaving free and discretionary cash flows at near break-even. 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 rating upgrade could be warranted if Encavis maintained Scope-adjusted EBITDA/interest cover above 4.0x on a sustained basis, together with further improvements in the geographical diversification with focus on jurisdictions with relatively stable regulatory environments and granularity of the own portfolio.

Scope could revise the Outlook back to Stable if Encavis failed to (i) maintain Scope-adjusted EBITDA/interest cover above 4.0x on a sustained basis e.g. as a result of lower operating cash flows due to major operational disruptions, material adverse regulatory interventions or significantly rising interest rates on new loans; or (ii) meaningfully improve diversification and granularity of the own portfolio. A rating downgrade, while remote, could be considered if Scope-adjusted EBITDA/interest cover fell below 2.75x.

Long-term and short-term debt ratings

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

Contractually subordinated (hybrid) debt rating is affirmed at BB, two notches lower than the issuer rating.

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.

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, (General Corporate Rating Methodology, 15 July 2022; European Utilities: Renewable Energy Rating Methodology, 17 January 2022), are available on https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
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-governance/definitions-and-scales. Historical default rates of the entities rated by Scope Ratings can be viewed in the Credit Rating performance report at https://scoperatings.com/governance-and-policies/regulatory/eu-regulation. 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-governance/definitions-and-scales. 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://scoperatings.com/governance-and-policies/rating-governance/methodologies.
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: Marlen Shokhitbayev, 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 2021.

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
© 2022 Scope SE & Co. KGaA and all its subsidiaries including Scope Ratings GmbH, Scope Ratings UK Limited, Scope Analysis GmbH, Scope Investor Services GmbH, and Scope ESG Analysis 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.