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 revised the Outlook to Stable from 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.

The rating action reflects Scope’s expectation that potential support from new shareholders will only partially offset weakening credit metrics amid moderating power prices and further acceleration of the growth strategy.

The full list of rating actions and rated entities is at the end of this rating action release.

Key rating drivers

Business risk profile: A- (unchanged). Encavis’ business risk profile benefits from its largely protected position as an independent power producer with its own generation portfolio comprising about 2.2 GW across over 200 renewable power plants. This is supplemented by about 1.4 GW in more than 80 plants operated as part of its asset management for third parties across Western Europe (positive ESG factor). Challenges include EBITDA margin* dilution driven by strong growth in the low-margin photovoltaic services business; some volume risks as a result of adverse weather effects or business interruptions and regulatory risks for regulated generation capacities.

In March 2024, a consortium led by KKR entered into an investment agreement with Encavis and announced its intention to acquire control of the company through a voluntary public tender offer. 87.4% of Encavis’ shareholders accepted the offer as of 18 June 2024. The investment agreement foresees a further acceleration of the company’s growth strategy, with the ambition to reach 7.0 GW of installed capacity by YE 2027 compared to the current target of 5.8 GW.

Scope expects the updated strategy to have a neutral overall impact on Encavis’ business risk profile in the short to medium term. The declining share of subsidised projects will likely be compensated for by growing outreach and the improving granularity of the company’s own portfolio. Encavis should be able to retain high profitability, e.g. an EBITDA margin of above 60% despite some dilution from strong growth in low-margin photovoltaic services.

Financial risk profile: BB (unchanged). The downward pressure on Encavis’ financial risk profile is driven by moderating power prices and an enlarged, mainly debt-financed investment programme.

Power prices, which continue to moderate from their peaks in 2022, have negatively impacted Encavis’ EBITDA. This is mainly due to subsidised projects in Germany and the Netherlands, where feed-in tariffs represent a floor price, as well as through exposure to merchant and short-term hedged volumes. The recently acquired projects will only contribute to EBITDA with a time lag, as most of them still need to be built and connected to the grid.

For 2024-2026, Scope expects a significant increase in investment spending to push free operating cash flow into negative territory. The agency forecasts that EBITDA/interest cover will decrease to 4x-5x from 5.9x at YE 2023 and that debt/EBITDA will increase to 7x-8x from 6.0x at YE 2023 based on the mainly debt-funded nature of investments and ongoing high interest rates. Scope notes that potential equity injections from new shareholders are likely to support credit metrics. However, the impact is limited by the relatively small size of the assumed equity funding compared to debt.

Liquidity: adequate. Encavis’ liquidity remains adequate. Scope notes that potential severe operational or liquidity issues at several large projects could impair liquidity at the holding company level. The agency does not yet anticipate any downside from this risk factor and will treat it as an event risk should it materialise.

Supplementary rating drivers: No impact. Scope believes that the new ultimate shareholders (mainly KKR and Viessmann) have the capacity and willingness to support Encavis to a certain extent. Nevertheless, Scope has provided no uplift for potential parent support due to the absence of parent guarantees (except for a backstop for debt subject to change of control clauses) and the lack of intention to enter into a domination and/or profit and loss transfer agreement for at least two years.

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

Outlook and rating sensitivities

The Stable Outlook reflects Scope’s expectation that free operating cash flow will turn negative, debt/EBITDA will increase to 7x-8x and EBITDA/interest cover will decrease to 4x-5x over the next few years. The Outlook also assumes a limited impact from adverse regulatory interventions on credit metrics and no dividend distribution. 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.

The upside scenarios for the ratings and Outlook are (individually):

1. Neutral or positive free operating cash flow, debt/EBITDA below 7.0x and EBITDA interest cover above 4.0x on a sustained basis
    
2. Strong parent support, e.g. through debt guarantees or regular substantial equity contributions

The downside scenario for the ratings and Outlook is:

1. EBITDA interest cover below 3.0x for a prolonged period.

Debt ratings

The senior unsecured debt rating has been affirmed at BBB-, the level of the issuer rating.

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

The affirmed S-2 short-term debt rating is based on the underlying BBB-/Stable issuer rating and reflects Encavis’ better than adequate short-term debt coverage and its diversified exposure to external funding channels.

Environmental, social and governance (ESG) factors

Renewable electricity generation in Europe benefits from tailwinds amid the ongoing energy transition recently amplified by the European energy crisis. Encavis’ renewable generation capacities benefit from a very strong position in the merit order system and very low carbon intensity. This is one of the key credit rating drivers for Encavis.

All rating actions and rated entities

Encavis AG

Issuer rating: BBB-/Stable, Outlook change

Senior unsecured debt rating: BBB-, affirmation

Subordinated (hybrid) debt rating: BB, affirmation

Short-term debt rating: S-2, affirmation

Encavis Finance BV

Issuer rating: BBB-/Stable, Outlook change

Senior unsecured debt rating: BBB-, affirmation

Subordinated (hybrid) debt rating: BB, affirmation

Short-term debt rating: S-2, affirmation

*All credit metrics refer to Scope-adjusted figures.

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, 16 October 2023; European Utilities Rating Methodology, 17 June 2024), 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 these 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 and/or Outlooks 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, Senior Director
Person responsible for approval of the Credit Ratings: Philipp Wass, Managing Director
The Credit Ratings/Outlooks were first released by Scope Ratings on 5 March 2018. The Credit Ratings/Outlooks were last updated on 27 July 2023.

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, as well as a list of Ancillary Services and certain non-Credit Rating Agency services provided to Rated Entities and/or Related Third Parties.

Conditions of use/exclusion of liability
© 2024 Scope SE & Co. KGaA and all its subsidiaries including Scope Ratings GmbH, Scope Ratings UK Limited, Scope Fund Analysis 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.