DBRS Comments on SunEdison’s Deteriorating Credit Profile and Its Impact on Northland Power Solar Finance One L.P.

DBRS Limited (DBRS) is today commenting on the impact a deteriorating SunEdison Inc. (SunEdison or the Company; unrated by DBRS) credit profile may have on Northland Power Solar Finance One L.P. (NPSF). SunEdison, headquartered in Missouri, is one of North America’s major solar panel manufacturers and renewable energy developers. Over the past few days, the Company’s credit profile has been rapidly deteriorating with heightened liquidity difficulties amid extremely high leverage (debt-to-capital ratio: 72%). The Company’s market value collapsed from a high of USD 10 billion in July 2015 to less than USD 0.1 billion in recent days. SunEdison’s trouble is further exacerbated by accounting and other potential irregularities, which are currently under investigation by the U.S. Department of Justice and the Securities and Exchange Commission’s (SEC). On March 29, 2016, TerraForm Global Inc., a public yieldco controlled by SunEdison, stated in its SEC filing that there is “a substantial risk that SunEdison will soon seek bankruptcy protection.” By all indications, a bankruptcy filing by SunEdison appears inevitable within weeks, if not days.

SunEdison is not rated by DBRS; however, its deteriorating credit profile does have an indirect impact on NPSF, whose secured project bonds are rated by DBRS at BBB (high) with a Stable trend. SunEdison supplied the solar modules for NPSF’s 60-megawatt solar project, which commenced operation in late 2013. NPSF’s residual exposure to SunEdison is its warranty obligations by way of a parent guarantee. DBRS has long recognized SunEdison’s weak credit as one of the main challenges. In its October 15, 2015, rating report, DBRS commented, “SunEdison is one of the largest panel manufacturers and renewable energy developers in the world; however, the credit profile of this company is still considered below investment grade with a high consolidated leverage ratio.”

DBRS has been conducting a preliminary assessment of the impact of SunEdison’s situation on NPSF’s $232 million project bonds. From a credit perspective, DBRS does not expect any near-term adverse effect on NPSF. SunEdison guarantees its modules from defects for five years, as well as a maximum annual degradation for 25 years. Despite experiencing recent financial woes, the Company is known for producing high-quality solar panels with long-term performance and below-industry-average warranty claim rates. Since achieving commercial operation status, NPSF’s solar assets have performed well, with average generation exceeding DBRS’s degradation-adjusted base case projections by 7%. According to the latest financial reporting to December 31, 2015, the project’s trailing 12-month debt service coverage ratio (DSCR) was at 1.85 times (x), comfortably beating DBRS’s conservative rating case projection at 1.58x. As a result, DBRS does not expect any potential warranty claims in the near term. In addition, the project structure features a module degradation reserve account (MDRA). If the modules degrade faster than the warranty threshold, causing the DSCR to fall below 1.45x, NPSF would be required to contribute to the MDRA for the remediation costs in the case of either (1) unsuccessful warranty claims or (2) warranty obligations no longer being enforceable. DBRS believes this credit enhancement provides additional comfort to bondholders in the event of SunEdison’s becoming insolvent.

From a legal perspective, in the event SunEdison’s parent guarantee of the warranty claims is discharged or otherwise terminated as a consequence of SunEdison’s insolvency, the step-in rights afforded to the bondholders with respect to the enforcement of the SunEdison guarantee will be rendered no longer effective.

DBRS will continue to monitor the developing SunEdison events and will provide further updates in due course.

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

The applicable methodology is Rating Solar Power Projects, which can be found on our website under Methodologies.

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