Concurrently, Moody’s has assigned a provisional (P)Ba2 rating to the GBP190 million Senior Secured Notes due 2020 (the Notes) to be issued by MEIF Renewable Energy UK Plc. The outlook on all ratings is stable.
The proceeds of the Notes will be used to refinance existing project finance indebtedness of the company’s biomass and landfill gas power generation subsidiaries; pay swap breakage costs and transaction fees; and to fund a distribution of approximately GBP78 million to the shareholder MEIF Lux Renewables SARL, a Luxembourg-based holding company owned by the Macquarie group.
Moody’s issues provisional ratings in advance of the final sale of securities and these ratings reflect Moody’s preliminary credit opinion regarding the transaction only. Upon a conclusive review of the final documentation, Moody’s will endeavour to assign definitive ratings to the Notes. A definitive rating may differ from a provisional rating.
RATINGS RATIONALE
The (P)Ba2 CFR is constrained by (1) the group’s small scale, relative to rated utility and power generation peers, and asset concentration risk, which will increase over time as the landfill gas portfolio declines; (2) the high level of leverage (gross debt to EBITDA of just under 4x), which would result from the planned refinancing and (3) the limited visibility over how equity and credit interests will be balanced in the coming years, which could result in significant refinancing risk at the maturity of the Notes.
It also reflects, as positives, (1) the fact that more than half of group earnings are derived from stable and transparent renewable energy subsidy mechanisms, controlled by the UK Government; (2) a commercial contracting structure including fuel procurement, access to landfill gas and sale of power and associated benefits, which could dampen the impact of movements in commodity prices on operating earnings; and (3) the group’s deleveraging potential, as demonstrated by strong historic levels of free cash flow.
MEIF Renewable Energy UK Plc is the new parent company of two businesses, Energy Power Resources Limited (EPRL) and CLP Envirogas Limited (CLP), which own and operate, respectively, five biomass-fired power plants (which use poultry litter, straw and meat and bone meal as fuels) and 68 landfill gas generating engines across 25 sites in Great Britain and with a total installed capacity of around 174MW.
Of these facilities, the two largest biomass plants at Thetford (38.5MW) and Ely (38MW) generated nearly 40% of group EBITDA in the year to 31 March 2014.
The rating agency considers that the group has very small scale compared to peers rated under the Unregulated Utilities and Unregulated Power Companies methodology and even compared with its closed rated comparator, Infinis Energy Plc (Ba3 stable), which had total generation capacity of 610MW as at the end of March 2014.
