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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.

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 profile and the strong financial risk profile 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.

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

Key rating drivers

Business risk profile. Axpo’s business risk profile still incorporates the utility’s solid competitive position as the Swiss leader in the energy sector, paired with an adequate profitability recently improved amid the supportive commodity environment.

The group is the market leader in Switzerland for renewable power generation and energy supply, with a strong position in the merit order stemming from the well-below-average carbon intensity of its power generation fleet (ESG factor: credit positive). At the same time, large exposure to nuclear power poses some regulatory, environmental and political risks mainly at the EU level (ESG factor: credit negative).

Profitability has recently strengthened after the declining trend in FY* 2021 and FY 2022, with the Scope-adjusted EBITDA margin** peaking 29% in FY 2023, boosted by significant gains in trading activity and increasing production from nuclear and hydro power plants. While margins are expected to remain robust in FY 2024, profitability is likely to progressively return to historical levels in the coming years in line with normalising market conditions; however higher power prices, which are no longer hedged three years ahead, will allow the EBITDA margin to remain solidly above 20%.

Financial risk profile. Axpo’s financial risk profile remains the primary supportive element of its standalone credit assessment and has improved further due to the exceptionally positive results achieved in FY 2023 and FY 2024 (so far), which led to considerably stronger credit metrics.

Given the unprecedented high EBITDA of CHF 3.0bn and ultimately the equally exceptional FOCF of CHF 1.3bn in FY 2023, debt decreased dramatically to CHF 0.2bn as of FYE 2023 (down CHF 4.1bn versus September 2022), leading to a record-low leverage of 0.1x (versus 7.5x at FYE 2022). As regards FY 2024, given solid margins and the residual release of previously posted cash collaterals, FOCF is expected to be around CHF 0.6bn, supporting an almost net cash position. In the coming years, although increasing capex and potential dividends will likely lead to higher debt, leverage is expected to remain stable well below 1.0x, also thanks to operating margins maintaining solid levels.

Even debt protection benefited from the robust margins recently achieved, as demonstrated by an EBITDA interest cover peaking to the record-high 66.1x in FY 2023 and expected to remain above 20x in FY 2024 (versus 5x on average over the period FY 2018-22). Also, Axpo incurred comparatively low amount of net interest paid, due to an effective liquidity optimisation capable to generate increasing interest income. For the next two years, interest cover is expected to decline while remaining above 10x, in light of higher interest paid and normalising EBITDA.

Liquidity: adequate. Axpo’s liquidity position is expected to remain solid, especially considering the high availability of undrawn committed credit facilities, with liquidity ratios standing sharply above 200%. From Scope’s perspective, external financing for growth capex and refinancing should not be a problem given Axpo’s broad access to financing channels.

Supplementary rating drivers: +2 notches. 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 the Swiss cantons and the essential public services provided by the company, signalled by its status as a “systemically relevant utility”. In December 2023 the CHF 4.0bn credit line from the Swiss federal government was revoked at Axpo’s request. Irrespective of this, the Federal Act allowing Axpo to apply for subsidiary financial aid remains in force until 31 December 2026. For this reason, Scope considers the willingness of the Swiss authorities to provide financial support to be unchanged. Based on the high capacity and the still high willingness to provide support, Scope has again applied a two-notch uplift to the standalone credit assessment.

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

Outlook and rating sensitivities for the underlying issuer rating

The Positive Outlook reflects Scope’s expectation that credit metrics will remain strong, with leverage – measured by debt/EBITDA – stable well below 1.0x for the next few years, supported by positive free operating cash flow despite normalising margins and increasing capex. The Outlook is also based on Scope’s view that potential shareholder support from public authorities will remain unchanged at least until the Federal Act on Subsidiary Financial Aid is in force (i.e. December 2026).

The upside scenario for the rating and Outlook is:

1. Debt/EBITDA remaining well below 1.0x on a sustained basis, supported by consistently positive free operating cash flow and solid profitability levels.

The downside scenarios for the ratings and Outlooks are (individually or collectively):

1. Debt/EBITDA not remaining well below 1.0x (reversion of the Outlook to Stable);
    
2. Sustained deterioration in the company’s financial risk profile, albeit deemed remote, as indicated by debt/EBITDA ratio above 2.0x;
    
3. 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.

Environmental, social and governance (ESG) factors

Axpo is leader in power generation from renewables in Switzerland, especially thanks to its experience and expertise in hydropower technology. Even at the European level, the Swiss utility is one of the main energy companies engaged in renewables and one of the leaders for low carbon footprint among power generators, thanks to its high share of low-carbon electricity production (nuclear and hydro). Axpo reported 56 gCO2e/kWh in FY 2023 (versus 95 gCO2e/kWh in FY 2022), one of the lowest levels among main European power generators and widely below the average (251 gCO2e/kWh), positioning itself as a leader in energy transition and showing a credit-supportive aspect from a ESG perspective.

At the same time, the group’s large exposure to nuclear power generation (around 50% of total production) poses some regulatory, environmental and political risks. In the long term, the potential phasing out of such technology could represent a risk for the company (especially social) and a big challenge as Axpo aspires to shift its business model towards decarbonised power generation.

All rating actions and rated entities

Axpo Holding AG

Short-term debt rating: S-1, affirmation

Axpo International SA

Short-term debt rating: S-1, affirmation

* Axpo’s financial year (FY) starts on 1 October (t) and ends on 30 September (t+1)
**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, (General Corporate Rating Methodology, 16 October 2023; European Utilities Rating Methodology, 17 June 2024; Government Related Entities Rating Methodology, 4 September 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.

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 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, Associate Director
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. The Credit Ratings were last updated on 4 December 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
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