DBRS Morningstar Assigns BBB Ratings with Stable Trends to MPT Finco Inc.

DBRS Limited (DBRS Morningstar) assigned an Issuer Rating and Series A Bonds and Series B Bonds (together, the Bonds) ratings of BBB with Stable trends to MPT Finco Inc. (the Issuer). The Issuer is a single-purpose funding vehicle established to issue the Bonds, the proceeds of which will be used to refinance existing debt, to make advances to affiliates, distributions and for general corporate purposes. The ten-year fixed-rate Bonds will finance the operations of four cascading operational hydro-generating facilities owned by Mississagi Power Trust (MPT; rated A (low) with a Stable trend by DBRS Morningstar) with a total capacity of 488 megawatts located on the Mississagi River in Northern Ontario (the MPT Portfolio or the MPT Assets). The Bonds, which amount to approximately $628 million in aggregate, will rank pari passu and partially amortize on a pro rata basis to mature on November 30, 2029, with an aggregate balloon amount of $350 million, subject to refinancing.

Debt service is underpinned by the fully contracted cash flow under two power purchase agreements (PPAs), the Master Power Purchase and Sale Agreement and the Mississagi Energy Revenue Support Agreement, with terms to match that of the Bonds. The effective offtakers are Brookfield Renewable Power Inc. (BRPI; through its guarantee) and Brookfield BRP Canada Corp. (BBCC), two entities affiliated with Brookfield Renewable Partners L.P. (BEP or the Sponsor; rated BBB (high) with a Stable trend by DBRS Morningstar). Although unrated, DBRS Morningstar’s internal assessment indicates that both BRPI’s and BBCC’s credit quality is consistent with that of BEP. Based on the long-term average generation (LTAG), the minimum debt service coverage ratio (DSCR) of 1.80 times (x) is consistent with that of the contracted hydro projects in DBRS Morningstar’s “A”-rating universe, without considering other factors. However, the assigned ratings are constrained by the offtakers’ credit quality and refinancing risk. The MPT Portfolio appears to be well positioned for re-contracting with the Independent Electricity System Operator (rated A (high) with a Stable trend by DBRS Morningstar) at debt maturity because of its significant storage capacity as an emissions-free peaker, which is of great importance to Northern Ontario’s grid stability. Nonetheless, DBRS Morningstar believes that future re-contracting uncertainty with potential merchant exposure increases the refinancing risk. DBRS Morningstar’s base refinancing case conservatively assumes a non-PPA renewal scenario. Under such a scenario, the base-case project loan coverage ratios (PLCRs) of 2.0x to 2.6x at P90 to P50 generation levels, respectively, still indicate ample cash flow to support a successful refinancing; however, this level of PLCR constrains the ratings to the BBB range according to DBRS Morningstar’s “Rating Project Finance” methodology. DBRS Morningstar does not assign ratings beyond the term of the Bonds but assesses the probability of a successful refinancing based on the MPT Assets’ remaining economic value at the refinancing point.

The MPT Portfolio’s strengths include (1)fully contracted cash flow with creditworthy offtakers, (2) a unique peaking hydro portfolio that is important to Northern Ontario’s grid stability, (3) high-quality assets with a reliable operating history and (4) a highly experienced owner-operator with robust credit quality. The challenges include (1) refinancing risk, (2) the constraint of the offtakers’ credit quality, (3) relatively high inter-annual hydrological variability and (4) future capex risk. The Bonds are structured as a project finance transaction with standard features, including a cash flow waterfall subject to blocked accounts. The key reserve accounts include a six-month Debt Service Reserve Account and a forward-looking Capex Reserve Account to be funded by cash or non-recourse letters of credit. The equity distribution lockup test is set at a minimum DSCR of 1.20x. Before the Second Closing Date (November 27, 2020), the Series A Bonds will be structurally subordinated to two pieces of debt to be refinanced by the Series B Bonds; however, this risk is significantly mitigated through (1) a limited-recourse guarantee by BBCC, a creditworthy counterparty, and (2) the estimated ample residual cash flow and collateral to the Bondholders. Once the Second Closing is achieved, the structural subordination will be eliminated and Bondholders will have the benefit of an MPT guarantee secured by a first-ranking security package over the MPT Assets. The delayed-draw nature of the Series B Bonds introduces an element of funding risk, driven by Series B investors’ potential inability to fund on the Second Closing Date, but this risk is partially mitigated by a high-quality investor list, the short duration of the funding exposure and the Sponsor’s ability to fill the funding gap if required. The Issuer and each Project Entity are subject to customary Separateness Covenants in the Trust Indenture. DBRS Morningstar relied solely on the separateness features applicable to the Issuer and each Project Entity to take comfort that such parties will remain legally and operationally separate and apart from the Sponsor and any of the Sponsor’s affiliates. DBRS Morningstar notes that it will not receive a substantive non-consolidation legal opinion for this transaction.

A rating upgrade is unlikely in the near term unless satisfactory re-contracting of the MPT Assets occurs well before the refinancing date. A negative rating action may be triggered by any of the following: heightened refinancing risk, especially toward debt maturity; a material deterioration of the PPA offtakers’ credit quality, further constraining the ratings; a material and sustained deterioration of credit metrics and/or asset quality; and an increased funding risk for the Series B Bonds.

Notes:
All figures are in Canadian dollars unless otherwise noted.

PXX means exceedance probabilities. A P50-P90-P99 value describes the estimated minimum electricity generation with a probability of 50%, 90% or 99% in any given year. For simplicity, the P50 value in this report is assumed to be equal to the LTAG, despite the potential discrepancy between these two values.

Project Entity means (1) prior to the Second Closing Date, each of MPT, Mississagi Property Inc. (MPI), Mississagi Power Trust Holdings LP and Mississagi Power Trust Holdings Inc., and (2) from and after the Second Closing Date, each of MPT and MPI.

Separateness Covenants include, but are not limited to, the following: (1) maintenance of separate books, records, financial statements and bank accounts; (2) business conducted solely in its own name; (3) the filing of its own tax returns as required by law; (4) no commingling of assets with those of other persons; (5) compliance with formalities to maintain its separate existence; (6) payment of its own liabilities from its own funds; and (7) fair and reasonable allocation of any overhead expenses shared with any affiliate. The Separateness Covenants are applicable to the Issuer and each Project Entity.

The principal methodologies are Rating Project Finance, DBRS Criteria: Guarantees and Other Forms of Support and DBRS Morningstar Criteria: Rating Corporate Holding Companies and Parent/Subsidiary Rating Relationships, which can be found on dbrs.com under Methodologies & Criteria.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link under Related Documents or by contacting us at info@dbrs.com.

The rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

Because the company is private and its financial statements are considered confidential by the Issuer, please note that DBRS Morningstar will not be publishing a rating report in addition to its press release with respect to the ratings.

For more information on this credit or on this industry, visit www.dbrs.com or contact us at info@dbrs.com.

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