Nordic Credit Rating (NCR) said today that it had assigned a 'BB' long-term issuer rating to Norway-based Småkraft AS. The outlook is stable. At the same time NCR assigned an 'N4' short-term issuer rating. NCR has also assigned 'BBB-' issue ratings to Småkraft's senior secured bonds to reflect material recovery prospects for secured creditors.
Rating rationale
The long-term rating reflects the company's comparatively high financial gearing, volatile margins and weak credit metrics. The rating is also constrained by the company's volatile operating environment, with large exposures to spot prices, limited diversity of pricing areas, and lack of reservoirs in its run-of-river plants, subjecting the company to additional hydrological risks. However, these factors are partly offset by the company's business model, which includes a high proportion of volume-dependent costs.
We see the company's position within the merit order system of power generation as a credit strength, with essentially no risk of having to limit production capacity and an ability to generate high margins at low system prices. We view the company's cost flexibility, generation of green energy, low impact on the natural environment and low carbon emissions as positive. The rating is supported by the company's strong committed owners and their willingness to provide equity funding for growth initiatives. We believe that the company can operate at higher leverage than industrial companies due to the asset intensity of the power industry, the liquidity of the company's power plants and its strong owners.
The rating on the company's senior secured bonds at 'BBB-', two notches above the long-term issuer rating reflects our expectations of material recovery prospects for secured creditors' in the event of a financial default. This is supported by the company's relatively low financial gearing in relation to the fair value of its power plants.
Stable outlook
The outlook is stable, reflecting our view that the company will refinance upcoming maturities at funding costs in line with our forecast. We expect Småkraft's margins to improve due to higher than historical system prices and cost-efficient operations, enabling it to offset some of the impact from increased funding costs. We expect owners to continue to support the company by providing equity for its acquisitions and for Småkraft to maintain its diverse funding structure with a high proportion of fixed-interest arrangements.
We could raise the rating to reflect improved credit metrics, with NCR-adjusted FFO/net debt above 15% and NCR-adjusted EBITDA/net interest above 3.5x over a protracted period. We could also raise the rating to reflect increased scale with stabilising profit margins.
We could lower the rating to reflect increased financial gearing with NCR-adjusted FFO/net debt below 5% or NCR-adjusted EBITDA/net interest below 2.0x over a prolonged period. The rating could also be lowered due to deteriorating operating conditions, with low energy prices and lower power generation, or if there are changes in ownership, negatively affecting risk appetite.
| Rating list | Rating |
|---|---|
| Long-term issuer credit rating: | BB |
| Outlook: | Stable |
| Short-term issuer credit rating: | N4 |
| Senior secured issue rating: | BBB- |
Contacts:
Gustav Nilsson, analyst, +46735420446, gustav.nilsson@nordiccreditrating.com
Geir Kristiansen, analyst, +4790784593, geir.kristiansen@nordiccreditrating.com
The methodology documents used for this rating are NCR's Corporate Rating Methodology published on 8 May 2023, NCR's Rating Principles published on 24 May 2022 and NCR's Group and Government Support Rating Methodology published on 18 Feb. 2022. For the full regulatory disclaimer please see the rating report.