These constraints are mitigated by Infinis' prominent position in what we see as a supportive, policy-driven U.K. market for renewable energy due to ambitious political targets, and what we consider to be attractive pricing benefiting from regulatory support. Further strengths include the stability of part of Infinis' revenues (Infinis sold 32% of its output under regulated contracts in the financial year-ended March 31, 2012), increased asset diversification into wind power, and above-average profitability and cash flow generation.
We assess the credit quality of Infinis by assessing the credit quality of the consolidated group under Infinis Holdings due to what we see as strategic, management, and operational links. Furthermore, we see no restrictions on cash flow movements within the group, with the exception of potential cash lock-up under covenants on several nonrecourse funding arrangements outside Infinis.
S&P base-case operating scenario
We believe that there is low demand risk for renewable energy output in the U.K. in the context of the government's ambitious long-term targets. Therefore, we believe the primary variables that determine Infinis Holdings' profitability relate to the achieved wholesale electricity prices, as well as the price and share of output sold under the U.K. government's Renewable Obligation (RO) framework. In our base-case operating scenario, Infinis Holdings' sales under RO will account for almost 90% of revenues in the next two years, compared to 79% in the quarter ending June 30, 2012. This should boost margins, because the achieved all-inclusive price under the RO has been approximately twice as high as the price under the alternative non-fossil-fuel obligation (NFFO) contracts. However, we also project a decline of the renewable obligation certificate (ROC) price post-2013 to as low as GBP40 per megawatt hour (MWh) if a significant portion of coal-fired generation capacity is converted into biomass generation. The likelihood of the latter occurring is uncertain at present, but could result in higher ROC supply and, therefore, lower ROC prices.
We expect that the group will continue to invest significant cash flows from LFG operations into the development and expansion of its operations, primarily in onshore wind parks. On the back of ongoing acquisitions and organic development, Infinis Holdings has grown rapidly to 571 MW of installed capacity, which is positive for credit quality by adding scale and asset diversity.
S&P base-case cash flow and capital-structure scenario
We assess the group's financial risk profile as "highly leveraged" in the context of its high financial leverage, weak cash flow debt coverage ratios, and refinancing risk related to the GBP275 million high-yield bond issue that expires in December 2014. We think this is especially true when considering the naturally declining output of LFG, and its compressing effect on the group's future cash flows.
We think Infinis Holdings' funds from operations (FFO)-to-debt ratio could weaken to 12%-13% at its low point in 2013 from 14.3% in the financial year ended March 31, 2012. Our opinion is based primarily on two factors. On the one hand, financial debt has already increased due to acquisitions the group has made since the financial year-end. On the other hand, we expect significant, albeit discretionary, investments in onshore wind parks, which will be partly debt-financed. We project the group's EBITDA will increase when it consolidates the acquired operational wind farms, but the increase will be less than the growth in leverage as some of the debt will be earmarked for new wind farms. In our view, the decline in the group's credit metrics would exhaust the available rating headroom, but FFO to debt of 12%-13% would still be commensurate with the current rating.
Future opportunistic acquisitions could be credit-dilutive, in our view, depending on the risk profile and financing of the acquired assets.
The group's liquidity is, in our view, "adequate," as defined in our criteria. We expect that the group's liquidity sources will cover the group's liquidity needs over the next twelve months by more than 1.2x. However, we believe that the available cash could be used for opportunistic acquisitions.
On March 31, 2012, according to the reported consolidated accounts, the consolidated group had the following liquidity sources:
-- Unrestricted cash of about GBP117.3 million (of which GBP53.6 million was at the rated issuer, Infinis), the majority of which we assume is available to Infinis if needed.
-- Our forecast that the group will generate Standard & Poor's-adjusted FFO of about GBP70 million over the 12 months to March 31, 2013. Our forecasts are supported by the good near-term visibility of cash flows under the group's forward power contracts.
This compares with:
-- Short-term debt of GBP30.7 million (GBP0.18 million at the rated issuer Infinis); and
-- Ambitious growth capital expenditure (capex) in wind farms, although most of this is discretionary at this stage. We estimate maintenance-focused capex in the order of GBP20 million per year in the next two years.
At the same time, we recognize the substantial refinancing risk related to the GBP275 million high-yield bond issued by Infinis, which matures in 2014. We currently assume that Infinis will proactively refinance the facility well in advance of its maturity. Failure to address the upcoming refinancing risk on a timely basis could lead us to review our liquidity assessment, and in turn, put pressure on the rating. So could any reassessment of the availability to Infinis of cash at the group level, which will remain essential for liquidity management at Infinis.
Financial covenants apply to nonrecourse debt obligations following the acquisition of wind farms, including that of Novera Energy in 2009. We expect the group to remain compliant with these covenants, as we understand was the case at March 31, 2012.
We maintain the recovery rating on Infinis' GBP275 million senior secured notes at '4', indicating our expectation of average (30%-50%) recovery prospects for noteholders in the event of a payment default.
Our simulated default scenario contemplates a default in the financial year-ending March 2015, mainly fueled by lower-than-expected wholesale power and ROC prices, increasing operational costs, and an inability to refinance the company's GBP275 million bond as it matures.
The debt facilities sitting at the various operating companies of Novera Energy Ltd. and Infinis Wind Holdings Ltd. are nonrecourse, and we exclude these businesses in our valuation of Infinis.
For our detailed recovery analysis, see "Infinis PLC's Recovery Rating Profile," published March 2, 2012, on RatingsDirect on the Global Credit Portal.
The stable outlook is underpinned by our anticipation that Infinis Holdings will maintain its leverage at levels that we consider commensurate with the ratings on Infinis in the near term, in particular that adjusted FFO to debt will not fall below 12%. We also believe that the group will continue to deliver a relatively stable operational performance.
The ratings could come under pressure if Infinis or Infinis Holdings engages in further material acquisitions, especially if these are debt-funded, or if we see evidence of more aggressive shareholder policies in terms of capital structure or dividend distributions. This could also restrain credit measures, causing adjusted FFO to debt to fall below 12%, which would no longer be commensurate with the ratings. Wholesale power prices falling lower than current market forward expectations, of between GBP50-GBP52 per MWh, and ROC prices falling below GBP40 per MWh after 2013, could also strain credit measures and the ratings. Potential downside could also arise if we consider that government support for renewable energy has diminished, or if the group faces difficulties in refinancing its high-yield bond well before its due date.
We see limited potential for rating upside at this stage, due mainly to the group's "highly leveraged" financial risk profile and near-term refinancing risk.
Related Criteria And Research
All articles listed below are available on RatingsDirect on the Global Credit Portal, unless otherwise stated.
-- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008
-- Methodology: Business Risk/Financial Risk Matrix Expanded, Sept. 18, 2012
-- Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011
-- Criteria Guidelines For Recovery Ratings On Global Industrials Issuers' Speculative-Grade Debt, Aug. 10, 2009