Rating action

Scope Ratings GmbH (Scope) has today assigned a first-time short-term debt rating of S-1 to Swiss utility Axpo Holding AG and financing subsidiary Axpo International SA for its Negotiable EUropean Commercial Paper (NEU CP) Program promoted by Banque de France. The NEU CP Program of Axpo International SA is backed by an unconditional and irrevocable guarantee from Axpo Holding AG.

Rating rationale

The assignment of a S-1 short-term debt rating reflects the strong credit quality of the issuers, supported by the good business risk and financial risk profiles of Axpo Holding paired with the group’s status as a government-related entity, which guarantees strong and extensive public support amid potential liquidity needs (as occurred in 2022).

Axpo’s business risk profile is based on a solid competitive position, especially in Switzerland, where the group is a market leader in renewable power generation and energy supply. The assessment is also supported by its fully integrated business model that covers power generation, distribution, trading, supply and energy services, which together ensure a solid diversification across the energy value chain.

Axpo is facing challenges linked to the energy transition. The transformation of its business model towards decarbonised power generation and the development of renewables and additional green technologies (hydrogen and batteries) has come with significant capex, which Scope expects to stand at around CHF 3.0bn until 2027. Such investments are expected to generate additional income and strengthen group margin in the medium term, but will temporarily burden the financial structure. Axpo is already one of the main European players in renewables, with a capacity of more than 5,000 MW (including hydro), with increasing capacity and a comparatively low CO2 footprint for its power generation fleet (credit-positive ESG factor).

Profitability is deemed solid despite a certain volatility in recent years, with an average EBITDA margin of historically around 20%, on par with other similar European integrated utilities. Whilst FY 2022 is expected to close with an eroded profitability (Scope-adjusted EBITDA margin forecasted at around 7%), mainly due to an accounting mismatch regarding Swiss production and the volatility of energy prices, higher power prices will likely sustain margin improvements in the coming years, with the EBITDA margin expected to return to historical levels of around 20%, benefitting from a good risk policy (i.e. effective hedging strategies).

At the same time, the business risk profile is constrained by low growth opportunities within Switzerland due to the saturation of the wholesale market and power generation technologies like nuclear and hydro as well as intense competition from established utilities across Europe. Despite a good penetration of important markets such as Italy and Spain, Axpo remains concentrated in the domestic market, which accounted for roughly 65% of recurring group revenue. Moreover, the high exposure to nuclear power generation in Switzerland, representing about 50% of Axpo's total Swiss power generation, poses regulatory, environmental and political risks (credit-negative ESG factor), even considering the potential phasing-out of such a technology in Switzerland in the long term.

Axpo’s financial risk profile shows a moderate and balanced financial structure, sustained by an adequate capacity to generate operating cash flow, which has largely been sufficient to finance capex needs and maintain stable indebtedness, i.e. leverage as measured by a Scope-adjusted debt/EBITDA of consistently below 3.0x over the last three financial years.

In 2021-2022, Axpo experienced a general deterioration of its financial risk profile amid the unprecedented turmoil in the energy sector, with high market volatility and the sharp rise in energy prices. Scope expects negative free operating cash flow at around CHF 4.5bn in FY 2022, mainly due to the significant increase in cash collateral for hedged energy contracts (margining deposits) that weighed on working capital and operating cash flow (over CHF 6.0bn of outflow in FY 2022) along with lower achievable margins in power generation. Leverage is expected to exceed 6.0x at FYE 2022 (September) versus 2.9x as at September 2021. This is the result of a widely debt-funded coverage of margining deposits that weighs on Scope-adjusted debt. However, the negative trend is considered as temporary. Indeed, Scope expects a return to positive free operating cash flow (CHF 1.8bn) in FY 2023, mainly supported by the release of CHF 2.7bn in cash collateral deposits and a robust EBITDA of CHF 1.5bn. Scope also expects a similar trend for 2023/24 and 2024/25, albeit with a smaller magnitude, contributing to positive free operating cash flow of CHF 0.8bn and CHF 0.3bn respectively. Leverage is expected to return to historical levels, likely at around 2.0x in the next two years.

Scope assesses capex coverage and leverage as solid, based on historical results and the normalising trend for the coming years, whilst underweighting the temporary deterioration expected for 2021/22. These two factors, together with the company’s robust liquidity profile, are the main aspects supporting the financial risk profile, which is partially constrained by a weaker but still good debt protection. EBITDA interest coverage has historically been modest at around 5.0x on average. It has been declining further in FY 2022 and is expected to reach 3.4x. However, the envisaged boost of EBITDA, paired with shrinking expected net interest (driven by decreasing financial liabilities), will likely support a material improvement of the metric above 7.0x as soon as FY 2023.

Axpo’s internal liquidity ratio has historically been considerably above 110%, reflecting low amounts of maturing debt (less than CHF 1bn per annum) compared to the group’s significant available cash. In FY 2022, the liquidity ratio is likely to turn negative for the first time over the historical period analysed, due to exceptional working capital absorption. Scope expects the internal liquidity ratio to be positive again and exceed 110% already in FY 2023 and predicts comfortable levels in the following years (always above 150%). Debt maturities within a range of CHF 2.0bn-3.0bn per annum are scheduled to be redeemed over the next few years. When considering a significant amount of committed unused bank facilities, Axpo’s overall liquidity profile is even stronger, with liquidity ratios standing sharply above 200%.

Axpo’s credit-neutral financial policy is prudent and overall sensible. The company has confirmed its strong commitment to maintaining a solid financial structure and discipline to safeguard its investment grade credit rating.

Scope defines Axpo as a government-related entity in accordance with Scope’s Government Related Entities Rating Methodology, based on the full public ownership by Swiss cantons and the essential public services provided by the company, signalled by its status a ‘systemically relevant utility’. Based on the high capacity and high willingness of the Swiss authorities (i.e. the cantons, direct shareholders of Axpo and the central government) to provide financial support if needed, Scope has applied a two-notch uplift to the standalone rating.

One or more key drivers of the credit rating action are considered an ESG factor.

Outlook and rating-change drivers

The Stable Outlook reflects Scope’s expectation that Axpo’s financial risk profile will recover in FY 2023, with Scope-adjusted debt/EBITDA declining towards 2.0x, bolstered by a release of working capital and robust free operating cash flow. The Outlook is also based on Scope’s view that the Swiss authorities will remain supportive based on Axpo’s ownership structure and its role as systemically critical utility in Switzerland.

A positive rating action could be considered if Scope-adjusted debt/EBITDA were sustained around 2.0x, along with a further strengthening of the business risk profile, driven by increasing diversification (e.g. higher presence outside Switzerland, lower concentration on nuclear) and improved profitability (i.e. EBITDA margin steady at around 20%).

A negative rating action could be triggered by a deterioration of credit metrics, with Scope-adjusted debt/EBITDA exceeding 4.0x on a sustained basis, or by any change that negatively affects Scope’s view of the current public support framework and potential shareholder support from public authorities.

Short-term debt rating

Axpo Holding AG provides an unconditional and irrevocable guarantee to the newly started Negotiable EUropean Commercial Paper (NEU CP) Program of Axpo International SA, promoted by Banque de France.

Scope has assigned an S-1 short-term debt rating based on the underlying strong issuer rating and a solid liquidity profile signalled by robust expected liquidity and good access to external funding from banks, the capital market and other funding channels.

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 this Credit Rating and/or Outlook, (General Corporate Rating Methodology, 15 July 2022; European Utilities Rating Methodology, 17 March 2022; Government Related Entities Rating Methodology, 6 May 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 Rating if the Credit Rating 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 Rating: 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 Rating 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 Rating and/or Outlook and the principal grounds on which the Credit Rating and/or Outlook are based. Following that review, the Credit Rating was not amended before being issued.

Regulatory disclosures
This Credit Rating and/or Outlook is issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0. The Credit Rating and/or Outlook is UK-endorsed.
Lead analyst: Marco Romeo, Senior Specialist
Person responsible for approval of the Credit Rating: Philipp Wass, Executive Director
The short-term rating/outlook was first released by Scope Ratings on 8 December 2022.

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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