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Rating action

Scope Ratings GmbH (Scope) has today affirmed the S-1 short-term debt rating on 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 affirmation of the S-1 short-term debt rating reflects the still 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.

Axpo’s business risk profile still reflects the utility’s 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 strong position in the merit order, thanks to the well-below-average carbon intensity of its power generation fleet (credit-positive ESG factor), deriving from the high number of hydro power plants and the further development of green technologies (solar, wind, hydrogen and batteries). At the same time, large exposure to nuclear power poses some regulatory, environmental and political risks mainly at the EU level (negative ESG factor).

While being penalised by the geographical concentration of revenue in the domestic market, Axpo benefits from its fully integrated business model that covers power generation, distribution, trading, supply and energy services, which together ensure a good diversification across the energy value chain.

Profitability remains the weakest driver of Axpo’s business risk profile, due to a certain volatility affecting the group’s margins in recent years from the unprecedented turmoil in the energy sector. After the declining trend in FY 2021 and FY 2022, mainly driven by an accounting mismatch on Swiss production and by lower electricity generation volumes, the Scope-adjusted EBITDA margin will likely reach an exceptional result in FY 2023 (estimated around 30% versus 6% in previous year), boosted by significant gains in trading activity and increasing production from nuclear and hydro power plants. In the next few years, given the gradual normalisation of market conditions (i.e. reduced volatility), profitability is expected to return to historical levels of around 20%, still sustained by high prices paired with an effective hedging strategy.

Axpo’s financial risk profile is the primary supportive element of its standalone rating and has improved further due to an exceptionally positive operational performance in FY 2023, reflected in the extraordinarily high Scope-adjusted EBITDA (estimated at around CHF 3.0bn) that should generate robust cash flow. Indeed, following the marked deterioration of free operating cash flow (FOCF) in FY 2022 (negative at CHF 2.4bn), strongly affected by the weakening of margins and the massive outflows for cash collateral, in FY 2023 the group will likely return to a positive and solid FOCF, mainly sustained by the robust Scope-adjusted EBITDA and a significant release of previously posted cash collateral. Accordingly, as of FYE 2023 in September, Scope-adjusted debt should decrease to around CHF 3.2bn (down CHF 1.1bn YoY), leading to leverage as measured by Scope-adjusted debt/EBITDA of 1.1x (versus 7.5x at FYE 2022), given also the extremely high EBITDA.

For FY 2024 and FY 2025, FOCF is expected to remain positive and robust, benefitting from still solid funds from operations and further release of cash collateral, capable to cover the increasing net capex planned by the group and even reduce financial indebtedness. As such, given a declining Scope-adjusted debt, Scope believes that leverage is likely to stand around 1.0x also in the coming years, despite expected lower margins.

As regards debt protection, the aforementioned boost of EBITDA should increase interest cover to above 10x in FY 2023 versus 3.1x in FY 2022, with interest paid experiencing a slight increase due to a higher average cost of debt (3.5% versus 2.5%). In the next two years, EBITDA interest cover will likely return to the historical levels (between 5x-6x), due to the envisaged normalisation of margins and still high interest paid.

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 experienced a significant deterioration, standing at 23%, due to the exceptional working capital absorption resulting in extremely negative free operating cash flow. Scope expects this ratio to once again exceed 110% in FY 2023 and predicts comfortable levels even in the following years, supported by robust free operating cash flows. 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 still 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 as 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 ESG factors.

Outlook and rating-change drivers

The Outlook was revised to Positive from Stable and reflects Scope’s expectation that credit metrics will remain strong, with leverage – measured by Scope-adjusted debt/EBITDA – stable below 2.0x over the next few years, sustained by a still solid cash generation capacity despite normalising margins and mounting capex.

A rating upgrade would be considered if the company confirmed the improvement of its credit metrics, with Scope-adjusted debt/EBITDA remaining well below 2.0x on a sustained basis, paired with a still solid cash flow generation, despite the cooling down of commodity prices.

A negative rating action, such as a reversion of the rating Outlook to Stable, could be considered if Scope’s expectation of Scope-adjusted debt/EBITDA remaining well below 2.0x does not materialise.

Further ratings downside – albeit deemed remote currently – could be triggered by i) a strong deterioration in leverage and cash flow generation, i.e. if Scope-adjusted debt/EBITDA exceeded 4.0x accompanied by negative free operating cash flows, or ii) any change that negatively affects Scope’s view of the potential shareholder support from public authorities.

Short-term debt rating

Axpo Holding AG provides an unconditional and irrevocable guarantee to the Negotiable EUropean Commercial Paper (NEU CP) Program of Axpo International SA, started in December 2022 and promoted by Banque de France.

Scope has affirmed the S-1 short-term debt rating based on the underlying 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 these Credit Ratings, (European Utilities Rating Methodology, 17 March 2023; General Corporate Rating Methodology, 16 December 2023; Government Related Entities Rating Methodology, 13 July 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.

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 the principal grounds on which the Credit Ratings are based. Following that review, the Credit Ratings were not amended before being issued.
 
Regulatory disclosures
These Credit Ratings are issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0. The Credit Ratings are UK-endorsed.
Lead analyst: Marco Romeo, Senior Specialist
Person responsible for approval of the Credit Ratings: Philipp Wass, Managing Director
The Credit Ratings were first released by Scope Ratings on 8 December 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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