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
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
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
-- 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
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
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,
-- Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011
-- Criteria Guidelines For Recovery Ratings On Global Industrials
Issuers' Speculative-Grade Debt, Aug. 10, 2009