Rating action

Scope Ratings GmbH (Scope) has completed a monitoring review and upgraded the rating assigned to the senior notes issued by Blauracke GmbH as follows:

Senior notes EUR 510.6m: upgraded to A- from BBB+

Transaction overview

Blauracke GmbH (the issuer) holds 49.89% of the limited partnership interests in two adjacent operational offshore wind farms in the German North Sea: the 497 MW Hohe See and the 112 MW Albatros projects. The 50.11% partnership interests are held by Energie Baden-Württemberg AG (EnBW), which plays a leading role in the operational management of the projects. The issuer used to be 51% indirectly owned by Enbridge Inc. (Enbridge), a leading Canadian energy company, and 49% indirectly owned by the Canadian Pension Plan Investment Board (CPPIB) through CPPIB Renewables Europe Sarl (the original issuer). The latter issued the EUR 510.6m senior notes in 2020 to finance its indirect interests in the underlying projects.

On 2 November 2023, CPPIB signed a sale and purchase agreement to divest its interest in the issuer’s holding company and transfer it directly to Enbridge, which now fully controls the issuer. As part of this transaction, key features of the financing structure were amended and approved by the noteholders. The original issuer transferred its contractual rights and obligations under the financing documents, including the senior notes, to the issuer via an assumption of contract. As a result, the senior notes are now issued by Blauracke with an outstanding amount of EUR 358.1m.

The security package relating to the assets and shares of the original issuer has been released. Now the noteholders benefit from a pledge over the accounts of the issuer and over 49% of its shares. The issuer’s articles of association have been amended to require unanimous consent for any shareholder resolution, giving the security trustee sufficient but not complete control following an enforcement event.

The original issuer, and therefore the noteholders, had access to 49% of Blauracke’s cash flows through shareholder distributions. Following the amendment of the transaction, in the event of cash flow stress, the noteholders benefit from a priority in the payment waterfall of 75% of Blauracke’s cash flows (after operating expenses and taxes) if the coverage ratios defined in the common terms agreement (CTA) do not meet certain thresholds. The mechanism is structured to avoid a payment default by increasing the cash flow available for debt service in a stress event. This has significantly increased the effective cash flow coverage of the senior notes.

The underlying projects have continued to perform satisfactorily, with full year 2022 and first half 2023 revenues ahead of Scope’s rating case projections. The covenant financial ratios also remain well above lock-up levels. For example, the 12-month backward-looking DSCR was 1.73x at the end of October 2023.

Rating rationale

The upgrade is primarily driven by a significant improvement in the effective cash flow coverage of the senior notes as a result of the cash management mechanism put in place, which allows access to a portion of the issuer’s cash flows for debt service that was previously outside the scope of the financing. Furthermore, the previous double minority structure has been simplified to a single minority financing, which has removed an element of complexity and noteholders’ reliance on the original issuer to upstream distributions from the current issuer.

The rating reflects the total expected loss (EL) of 0.24% over the notes’ life until maturity (equivalent to a 4.69-year constant-exposure expected risk horizon).

The rating is underpinned by the (i) project’s stable revenues, with no price risk over the tenor of the debt, (ii) robust coverage ratios and strong cash flow sensitivities, (iii) refinancing risk sufficiently mitigated by a reserve mechanism, (iv) experienced operators and a good operating track record to date, and (v) the financing of a minority interest with a relatively weak security package compared to typical project finance structures.

• Construction risks account for 0.0% of total EL. There is no construction risk as all wind turbines started operation by the end of 2019.
   
• Operational risks account for 34.9% of total EL. Offshore wind farm operations are inherently complex and rely heavily on the competence of operators and the technical integrity of key equipment. The operational track record of the projects over the last four years has been good. The largely fixed-fee O&M contracts with Siemens and EnBW cover the term of the debt and mitigate the uncertainty of operating costs. No major capital expenditure is expected during the loan tenor.
   
• Revenue risks account for 21.8% of total EL. The priority dispatch of electricity, the absence of price risk due to regulated fixed tariffs during the effective loan tenor, and the generally good quality and reliability of the offshore wind resources mitigate the risk of revenue fluctuations. The strong economic rationale, negligible risk of retroactive regulatory change in Germany and high barriers to entry compensate for the project’s dependence on subsidies.
   
• Financial strength risks account for 25.9% of total EL. The transaction has robust coverage ratios above Scope-rated peers due to increased cash flow allocation in stress scenarios (minimum and average adjusted DSCRs of 2.00x/2.19x respectively; note that this differs from the CTA definition). Refinancing risk associated with the balloon is partially mitigated by a mandatory reserve mechanism. This mechanism allows the balloon to be fully repaid without monetising the tail period cash flows in Scope’s rating case. The useful economic life after the debt term is 12.5 years, but the cash flow generation is significantly lower compared to the feed-in-tariff received during the life of the notes. Enbridge is permitted to replace cash in the balloon reserve with a corporate guarantee (subject to rating triggers), which has increased financial counterparty risk. Enbridge’s credit quality is not currently a rating constraint on the senior notes, but could become a constraint during the balloon reserve period if the tail cash flow assumptions deteriorate.
   
• Project structure and compliance risks account for 17.4% of total EL. The transaction benefits from standard project finance protections regarding bankruptcy remoteness, German law contracts and strong cash flow controlling covenants. The transaction structure does not allow noteholders to take control of wind farm assets directly after enforcement, but their rights are protected by the provisions of the partnership agreement between EnBW and Blauracke. The likelihood of force majeure events is low, and the project has a comprehensive insurance package.

Key rating drivers

Stable and predictable long-term revenues (positive). There is no power price risk during the debt tenor, and there is limited price risk thereafter. This is because the conservative market price assumptions do not significantly exceed the regulatory floor price until year 20 of operation. The good quality and reliability of offshore wind yields in the German North Sea mitigates resource risk.

Robust, improved cash flow coverage (positive). Lenders benefit from a higher allocation of the issuer’s cash flows to support debt service following the recent amendment to the financing documents. As a result, the effective cash flow coverage ratios have improved significantly and represent low risk for a project with no price risk over the loan tenor.

Solid operational arrangements (positive). Siemens Gamesa Renewable Energy and EnBW will operate and maintain the project for 25 years. The O&M contract prices are largely fixed, reducing budget uncertainties. The O&M budget includes a comprehensive spare parts portfolio.

Limited refinancing risk (positive). Refinancing risk is low as the balloon at maturity (10% of the initial debt amount) is mitigated by the mandatory funding of a balloon reserve account, which covers the balloon in the rating case, albeit without a buffer. The refinancing of any potential shortfall after this reserve is supported by cash flows derived from merchant revenues over the 12.5-year post-maturity tail.

Experienced sponsors with strong economic incentives (positive). The sponsor are experienced, have low counterparty risk, high technical capabilities and significant economic incentives. Enbridge’s commitment is evidenced by the acquisition of CPPIB’s interest with significant economic incentives. These incentives are indicated by a low debt-to-equity gearing ratio of 57:43 based on the 49% shareholding pledged to the lenders and a gearing of 28:72 based on Enbridge’s 100% shareholding (equity value is based on the acquisition price).

Security package limitations (negative). Noteholders do not have direct access to the underlying assets of the operating companies, although this issue is partially mitigated by the robust governance provisions of the wind farm operating companies. The security package consists of the issuer’s account pledge and a share pledge over 49% of the issuer’s shares. Although the position of the security trustee as a minority shareholder following enforcement is protected by the requirement for unanimous shareholder approval, it is a weaker position compared to a standard security package, where lenders can take full control of the borrower.

Unindexed tariffs (negative). The project is eligible for the extended feed-in tariff until the beginning of 2032 on average, but its value is not indexed, so high inflation would erode the economics of the project. However, the sensitivity calculation shows adequate resilience to increased inflation.

Proven but specialised technology (negative). Operating offshore wind farms requires highly specialised skills and takes place in a harsh environment. The Siemens 7 MW turbine is a modified version of the 6 MW model, both of which are widely used with satisfactory performance. The project’s operational track record to date has been robust. However, some turbines may incur additional costs due to main bearing replacement.

Significant dependence on subsidies (negative). Low regulatory risks, a strong project rationale and high barriers to entry mitigate the risk of retroactive subsidy cuts. Scope also notes that the project’s competitiveness has improved in the current high power-price environment.

Rating-change drivers

Positive rating-change drivers:

• The scope for a rating upgrade is limited, but a material improvement in cash flows over the life of the project could lead to a rating upgrade.

Negative rating-change drivers:

• Operational problems, persistently lower cash flows than assumed in Scope’s rating case or adverse regulatory changes could lead to a rating downgrade.

Quantitative analysis and assumptions

The total EL on the rated instrument is commensurate with a rating of A-. Scope calculated an EL of 0.24% over the lifetime of the instrument (equivalent to a constant exposure expected risk horizon of 4.69 years) under the rating case scenario (Scope’s rating case), which is more conservative than the sponsor’s base case scenario. Scope’s rating case assumes P90 energy yield, 96% turbine availability, cost inflation of 8.6% for 2022, 6.3% for 2023, 3.1% for 2024 and 2.0% p.a. afterwards, and captured power prices at the floor price of EUR 39/MWh at maturity with a modest increase in real terms afterwards during the economic life.

Scope calculated an expected impairment likelihood of 1.07% for this project, commensurate with a PD strength of bbb+ when expressed using the levels in Scope’s idealised PD curves, as per Scope’s methodology. The project’s PD strength and EL result from the aggregated risk of the construction and operational phases.

Scope calculated a total expected recovery rate of 77.78% on credit impairments for the project. The total expected recovery rate is the probability-weighted average recovery rate of all 16 credit impairment events.

Scope made a detailed estimate of the expected severity of the three credit impairment events that are most relevant for investors. These are: i) operational performance, budget and schedule issues; ii) revenue deterioration; and iii) O&M counterparty issues. Together, these three credit impairment events contribute 48.3% of the EL for investors.

Sensitivity analysis

Scope tested the resilience of the rating to deviations in the two main input parameters: risk factor scores and expected recovery rates. This analysis has the sole purpose of illustrating the quantitative outcomes’ sensitivity to input assumptions and is not indicative of expected or likely scenarios.

• Sensitivity of reducing all 23 risk factors by one level: bbb-
   
• Sensitivity of reducing the most relevant risk factor score by two levels: bb+
   
• Sensitivity of reducing the expected recovery rate by 25%: bbb+

ESG risks

With regard to the environmental pillar, considerations regarding the air pollution and GHG emissions ESG theme are credit-positive for the project. The wind park produces power without emitting any harmful exhaust gases into the air. It requires essentially no water to operate and thus does not pollute water resources. This reduces the risk of stricter environmental protection laws triggering additional capex needs or adverse regulatory action. Considerations regarding the social and governance pillars are neutral for the project.

Stress testing
Scope Ratings’s General Project Finance Rating 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 to be a form of stress testing. The stresses in the rating case use the project’s financial model to incorporate haircuts to cash flows for investors.
Scope Ratings 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 operational performance, budget and schedule events cover turbine availability as the main driver. Scope Ratings 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 Ratings relied on the project’s financial model, originally prepared by Voltiq, for its cash flow analysis of the transaction. The cash flow analysis incorporates Scope Ratings’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’ notional amount and coupons. The cash flow analysis is used to assess the different risk factors and recovery risk factors as well as to determine the expected recovery of the top three credit impairment events considered in Scope Ratings’s General Project Finance Rating Methodology.

Methodology
The methodologies used for this Credit Rating, (General Project Finance Rating Methodology; 16 November 2023; Counterparty Risk Methodology, 13 July 2023) are available on https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
The model used for this Credit Rating is (Project Finance Expected Loss Model Version 1.2), available in Scope Ratings’ list of models, published under 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.

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, the Rated Entities’ Related Third Parties, third parties 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 the principal grounds on which the Credit Rating are based. Following that review, the Credit Rating was not amended before being issued.

Regulatory disclosures
This Credit Rating is issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0. The Credit Rating is UK-endorsed.
Lead analyst: Marton Zempleni, Senior Representative
Person responsible for approval of the Credit Rating: Aaron Konrad, Executive Director
The Credit Rating was first released by Scope Ratings on 13 February 2020.

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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