Nordic Credit Rating (NCR) said today that it had affirmed its 'BB' long-term issuer rating on Norway-based small-scale hydropower producer Småkraft AS. The outlook is stable. At the same time, the 'N4' short-term issuer rating and 'BBB-' senior secured issue ratings were also affirmed.
Rating rationale
The affirmation reflects our expectations that Småkraft's revenues and earnings will rebound as we expect higher electricity prices in our forecast period than in the second half of 2023, which was negatively affected by the Storm Hans. We believe this will result in a stabilisation of financial gearing within our rating drivers under normal market volatility. Structurally increased demand for electricity due to continued electrification of existing industries and the establishment of new industrial projects is likely to support higher electricity prices going forward. We are, however, cautious about the impact of an expansion of intermittent renewables in Europe, as this could impact the import price and amplify price volatility in Norway.
The 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 a lack of reservoirs in its run-of-river plants, subjecting the company to additional hydrological risks. However, these factors are partly offset by Småkraft'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 first priority 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 and the possibility of deleveraging through power plant sales.
The affirmation of the 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 based on recent transaction multiples and first priority pledge on transaction security.
Stable outlook
The outlook is stable, reflecting our view that the company's revenues and earnings will rebound relative to the weak performance in 2023. We expect Småkraft's margins to improve over the forecast period due to higher than pre-pandemic 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 prolonged 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 that negatively affect risk appetite.
Related publications
i) Unregulated Nordic power producers well positioned to capitalise on higher prices, 2 Oct. 2023.
| Rating list | To | From |
|---|---|---|
| Long-term issuer credit rating: | BB | BB |
| Outlook: | Stable | Stable |
| Short-term issuer credit rating: | N4 | N4 |
| Senior secured issue rating: | BBB- | BBB- |
Contacts:
Gustav Nilsson, analyst, +46735420446, gustav.nilsson@nordiccreditrating.com
Geir Kristiansen, analyst, +4790784593, geir.kristiansen@nordiccreditrating.com
Elisabeth Adebäck, analyst, +46700442775, elisabeth.adeback@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 14 Feb. 2024 and NCR's Group and Government Support Rating Methodology published on 14 Feb. 2024. For the full regulatory disclaimer please see the rating report.