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Rating action

Scope Ratings GmbH (Scope) has today affirmed the BBB- issuer rating on Encavis AG and its financing subsidiary Encavis Finance BV. The Outlook remains Positive. 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

The rating action reflects Scope’s view that the accelerated growth strategy will have an overall neutral impact on Encavis’ business risk profile and that the company is likely to maintain its moderate credit metrics.

The European energy crisis accelerated the expansion of renewable energy. European governments plan to reduce their dependence on Russian fossil fuels and fast forward the green transition. The private sector is likely to keep increasing its demand for renewable power, driving up power purchase agreements. This trend is also supported by the phasing-out of subsidies for renewable power generation and high power prices compared to pre-crisis levels. High power prices are likely more than offset the combined effect on profitability of new projects stemming from high inflation and increased interest rates.

Given these circumstances, Encavis decided to accelerate its growth trajectory and pursue ambitious goals for 2027. The company plans to almost triple its generation capacity connected to the grid from 2.1 GW in at the beginning of 2023 to 5.8 GW by 2027, increase revenue from EUR 440m guided for 2023 to EUR 800m in 2027, and increase EBITDA from EUR 310m to EUR 520m. Gross investments of EUR 3.9bn will be mainly financed by non-recourse project finance debt; operating cash flow; new debt at holding level; and minority shareholders at project level. The company will also pay no dividends in 2023 and Scope expects no dividend payments in the next few years.

Scope expects the updated strategy to have an overall neutral impact on Encavis’ business risk profile. The decreasing share of subsidised projects will likely be compensated by growing outreach and improving granularity of the own portfolio. Encavis should be able to retain high profitability, e.g. a Scope-adjusted EBITDA margin of above 60% despite some dilution driven by strong growth in low-margin photovoltaic services. Encavis’ business risk profile continues to reflect its largely protected position as an independent power producer with own power generation portfolio that comprises about 2.1 GW across more than 200 renewable power plants. This is supplemented by about 1.4 GW in around 100 plants operated as part of its asset management for third parties across Western Europe (ESG factor: credit-positive environmental risk factor).

In 2022, the company generated record-high Scope-adjusted EBITDA of EUR 352m, much higher than in 2021. This was primarily driven by very high power prices but also higher power generation (up 14% YoY) and only slightly dampened by price caps in Spain, Italy and Germany (total impact EUR 25m). As a result, Scope-adjusted EBITDA/interest cover exceeded 6x and Scope-adjusted debt/EBITDA improved to 5x.

For 2023-2025, Scope expects strong financial results with annual Scope-adjusted EBITDA at around EUR 310m-420m, mainly driven by accelerated growth in generation capacity and only partly offset by lower power prices compared with the exceptionally high levels in 2022. Scope expects the company to increase total investment spending significantly to EUR 500m-700m per year. Considering the mainly debt-funded nature of investments and ongoing high interest rates, Scope expects Scope-adjusted EBITDA/interest cover to decrease to around 4x-5x and Scope-adjusted debt/EBITDA to increase to around 6x-7x. The Scope-adjusted free operating cash flow/debt ratio, which excludes acquisitions, is likely to remain positive.

Liquidity remains adequate. Liquidity ratios are expected to stand comfortably at above 110% in the foreseeable future, supported by a large unrestricted cash cushion of EUR 408m at end-March 2023 and committed undrawn long-term credit lines of EUR 146m. Scope assumes that the amortisation of loans at project level (EUR 120m-130m yearly) can be sufficiently covered by the operating cash flow of the project companies. This is also backed by significant cash reserves at the project companies (aggregated amount of EUR 55m as at end-March 2023). Ultimately, Encavis has demonstrated a diversified approach to external funding, including bank and capital market financing at project level, as well as private debt (shareholder loans and Schuldschein debt) and public debt at group level, which could support external funding if needed.

Scope maintains its neutral view of Encavis’ financial policy, which should help the company to keep growing while maintaining the quality of its financial risk profile. The company’s healthy financial policy is evidenced by funding measures, such as the use of equity-like financing instruments, the flexible dividend policy going forward (including the option of no dividend as is the case for 2023), the wide use of financial covenants, cash reserves at project level and a minimum equity ratio of 24%.

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

Outlook and rating-change drivers

The Positive Outlook reflects Scope’s expectation that Scope-adjusted EBITDA/interest cover will remain above 4.0x and Scope-adjusted debt/EBITDA below 7.0x over the next few years, supported by Encavis’ gradually improving diversification. The Outlook also assumes a limited impact on credit metrics from adverse regulatory interventions. Scope expects Encavis will continue to acquire renewable power plants and distribute no 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 special-purpose vehicle 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 and Scope-adjusted debt/EBITDA were sustained at below 7.0x, together with further improvements in geographical diversification with a focus on jurisdictions with relatively stable regulatory environments and granularity of the own portfolio.

Scope could revise the Outlook to Stable if Encavis failed to i) maintain Scope-adjusted EBITDA/interest cover above 4.0x and/or Scope-adjusted debt/EBITDA were sustained at below 7.0x, e.g. as a result of lower operating cash flow due to major operational disruptions, material adverse regulatory interventions or significantly rising interest rates on new debt; 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 well below 3.0x.

Long-term and short-term debt ratings

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

Scope has affirmed the contractually subordinated (hybrid) debt rating at BB, two notches lower than the issuer rating.

Scope has also affirmed the short-term debt rating 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 Rating Methodology, 17 March 2023), 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: Olaf Tölke, Managing Director
The Credit Ratings/Outlooks were first released by Scope Ratings on 5 March 2018. The Credit Ratings/Outlooks were last updated on 12 September 2022.

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

Conditions of use/exclusion of liability
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