TerraForm Power Operating LLC -- Moody's affirms TerraForm Power's Ba3 CFR; changes outlook to negative

Rating Action: Moody's affirms TerraForm Power's Ba3 CFR; changes outlook to negativeGlobal Credit Research - 05 Apr 2021Approximately $1.9 billion of debt securities affectedNew York, April 05, 2021 -- Moody's Investors Service ("Moody's") today changed the outlook of TerraForm Power Operating LLC (Terraform Power or TPO) to negative from stable and affirmed TPO's Ba3 corporate family rating (CFR), Ba3 senior unsecured rating and Ba3-PD Probability of Default rating. TPO's speculative grade liquidity rating is unchanged and remains SGL-2.RATINGS RATIONALE"Terraform Power's negative outlook reflects the company's persistently weak financial ratios that have continued with the recent release of its year-end 2020 audited financial statements" said Natividad Martel, Vice President - Senior Analyst. "An increase in project level debt by around $300 million to $4.9 billion, adjusted to reflect proportional consolidation, during 2020 offset any improvement in Terraform Power's EBITDA and resulted in a ratio of debt to EBITDA of nearly 8.5x, adjusted to reflect proportional consolidation, against our initial expectation of 8.0x at year-end 2020" added Martel.TPO has indicated that it remains in compliance with the financial covenants under its revolving credit legal documentation although it does not disclose its covenant calculation, that includes a maximum leverage ratio of net debt to cash flow available to debt service of 5.75x.This is the third consecutive year in which the company failed to meet our expectation of a debt to EBITDA ratio below 8.0x that we had articulated when the company was upgraded to its current Ba3 rating in 2018. The negative outlook reflects our view that this financial metric weakness is likely to continue and potentially lead to a lower rating.The affirmation of the Ba3 CFR considers TPO's diversified and contracted cash flow which, along with current focus on organic growth, costs savings and the amortizing profile of most of its debt, could help reverse recent trends and gradually improve its leverage ratios over time.Our expectation of a more moderate growth strategy considers last year's privatization of TPO's parent company, Terraform Power, Inc. (TERP; unrated) when Brookfield Renewable Partners L.P. ("BEP"), Brookfield Renewable Corporation ("Brookfield Renewable Corporation" or "BEPC") and affiliates became the shareholders of TERP. Still, the negative outlook considers that TPO's credit metrics will likely remain weak for the rating over the next twelve months in the absence of any initiative to further strengthen the balance sheet.LiquidityTPO's SGL-2 speculative grade liquidity rating reflects good liquidity. The SGL-2 considers TPO's $800 million secured revolving credit facility, scheduled to mature in October 2024, that remained largely available at year-end 2020. TPO had no borrowings under the facility and the outstanding letters of credit approximated $125 million at the end of 2020. The SGL-2 also assumes that TPO's moderate, organic growth strategy will further enhance its liquidity profile such that it will be able to meet its capital requirements, including interest of around $90 million, solely with dividend distributions received from its projects after their debt service.TPO has indicated that it remains in compliance with the financial covenants under its revolving credit legal documentation although it does not disclose its covenant calculation, that includes a maximum leverage ratio of net debt to cash flow available to debt service of 5.5x. The SGL-2 also considers that TPO could obtain additional liquidity, if necessary, from the sale of its assets. TPO's next maturity consists of its $500 million Notes due in 2023.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGSFactors that could lead to an upgradeTPO's ratings could experience positive momentum if its consolidated debt to EBITDA falls below 7.0x, on a sustainable basis.Factors that could lead to a downgradeA downgrade is likely if TPO's credit metrics remain weak for the rating, including a ratio of consolidated debt to EBITDA that continues to exceed 8x in 2021. TPO's ratings could also be lowered if, against our expectations, its new ownership structure results in an aggressive growth strategy or cash distribution policy that is detrimental to TPO's credit quality.Affirmations:..Issuer: TerraForm Power Operating LLC.... Probability of Default Rating, Affirmed Ba3-PD.... Corporate Family Rating, Affirmed Ba3....Senior Unsecured Regular Bond/Debenture, Affirmed Ba3 (LGD4)Outlook Actions:..Issuer: TerraForm Power Operating LLC....Outlook, Changed To Negative From StableThe principal methodology used in these ratings was Unregulated Utilities and Unregulated Power Companies published in May 2017 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1066389. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.REGULATORY DISCLOSURESFor further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. 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Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1243406.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating. Natividad Juana Martel Vice President - Senior Analyst Project & Infrastructure Finance Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. 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