Nordic Credit Rating (NCR) has lowered its long-term issuer rating on Norway-based small-scale hydropower producer Småkraft AS to 'BB-' from 'BB'. The outlook is negative. The senior secured issue rating has been lowered to 'BB' from 'BBB-' reflecting expectations of a significant decline in asset values and increased uncertainty following the Norwegian government's proposal to introduce a resource rent tax on small-scale hydropower. The 'N4' short-term issuer rating was affirmed. The ratings have been withdrawn at the issuer's request.
Rating rationale
The lower long-term issuer rating reflects our expectation that Småkraft will maintain funds from operations to net debt below 5% and interest coverage below 2x for an extended period. We anticipate that lower electricity prices will weaken cash flows, making deleveraging less likely than previously assumed. The rating also incorporates our expectations of weaker financing conditions due to increased political risk and reduced investor risk appetite. The lower senior secured issue rating reflects the downgrade of the long-term issuer rating and expectations of reduced recovery prospects for senior creditors, as deal flow slows. This is expected to have short- to medium-term negative implications for asset values, with investors potentially assigning higher risk premia to small-scale hydropower.
On 15 Oct. 2025, the Norwegian government proposed lowering the resource rent tax threshold for hydropower from 10,000 kVA to 1,500 kVA as part of the 2026 national budget. If enacted as proposed, the measure would increase the tax rate for small-scale hydropower producers to 67% from the current 22%. Approximately 85% of Småkraft's power plants would become subject to the tax, significantly reducing the company's deleveraging capacity, eroding its previous competitive advantage over hydropower peers, and negatively affecting asset values and senior creditor recovery prospects.
While the proposal is likely to be defeated in parliament after five opposition parties indicated they would vote against it, we believe it has led investors to assign a higher risk premium to operating and financing small-scale Norwegian hydropower, elevating refinancing risk for capital markets financing. Access to bank financing, however, appears to be solid. In our view, operating conditions have become less predictable following the proposal, with deal flow slowing and projects being put on hold. Consequently, we are concerned about the development of the market and the implications for the company's competitive position.
Negative outlook
At the time of withdrawal, the negative outlook reflected our expectation of worsened financing conditions because of reduced investor risk appetite for Norwegian small-scale hydropower. We expect the company will be able to withstand current turbulence and refinance its maturing debt. However, the long-term direction of its financial risk profile and potential additional risks to its business model remain uncertain. We currently believe that the owners will support the company through committed equity capital but are uncertain about their willingness to provide funds outside of those committed to project investments.
Related rating actions
i) Småkraft AS outlook revised to negative; 'BB' long-term issuer rating affirmed, 7 Mar. 2025.
i) Småkraft 'BB' long-term issuer rating affirmed; Outlook stable, 16 Aug. 2024.
| Rating list | Withdrawal | To | From |
|---|---|---|---|
| Long-term issuer credit rating: | NR | BB- | BB |
| Outlook: | - | Negative | Negative |
| Short-term issuer credit rating: | NR | N4 | N4 |
| Senior secured issue rating: | NR | BB | 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.