DBRS Confirms Hannon Armstrong at BBB (low), Trend Changed to Negative

DBRS, Inc. (DBRS Morningstar) confirmed the BBB (low) Long-Term Issuer Rating of Hannon Armstrong Sustainable Infrastructure Capital, Inc. (HASI or the Company), as well as the BBB (low) rating of the Company’s Convertible Senior Notes. At the same time, DBRS Morningstar has revised the trend on the ratings to Negative from Positive. The Company’s Intrinsic Assessment is BBB (low), while its Support Assessment is SA3.

KEY RATING CONSIDERATIONS
In confirming the ratings and revising the trend to Negative, DBRS Morningstar recognizes the considerable headwinds facing all non-bank financial institutions, particularly those with a niche focus on a sector that is facing near-term challenges. DBRS Morningstar has typically viewed HASI’s focus on renewable energy financing as a strength given the long-term growth opportunities in the sector, as well as HASI’s significant expertise and long-standing relationships with renewable energy participants. However, given the abruptness and severity of the economic contraction caused by the Coronavirus Disease (Covid-19), combined with the uncertainty of the magnitude or duration of the downturn, we have concerns regarding the impact on the Company’s concentrated business model. We see the near-term challenges in the renewable energy sector as significant, with potential issues including reduced demand, supply chain disruptions and project delays, all of which could have an adverse impact on HASI’s financials.

Supporting the BBB (low) rating is HASI’s strong balance sheet, which includes a conservative usage of leverage and diversified funding channels. The Company’s pipeline remains strong and its client base is focused on high credit quality obligors for assets that generate recurring and predictable long-term cash flows. The ratings also incorporate the Company’s increasingly riskier portfolio mix, which now includes higher levels of mezzanine debt, real estate and equity investments. Furthermore, due to the coronavirus impact, we see increased risk in HASI’s residential solar portfolio. While DBRS Morningstar sees HASI as having strong underwriting capabilities, the risk/reward assumptions associated with these loans and investments may have significantly changed in recent weeks.

RATING DRIVERS
The trend could revert back to Stable if the Company continues to generate consistent returns on a core earnings basis despite the considerable impact of the coronavirus. While DBRS Morningstar expects a decline in profitability over the near-term, if HASI’s earnings were to return to sustainable levels relatively quickly post-downturn, while maintaining a similar risk profile, we could see positive pressure on the ratings over the longer-term.

Conversely, a severe economic downturn that is prolonged resulting in significantly weakened credit fundamentals would result in a ratings downgrade.

RATING RATIONALE
HASI’s franchise is strong, benefiting from its well-established presence in the energy efficiency and renewable energy markets where it provides flexible, tailored financing solutions to its sizeable client base. HASI maintains a leading market position in these niche markets, which is underpinned by its long-standing relationships with large global energy service companies (ESCOs), as well as with renewable energy manufacturers, developers, and operators. HASI’s management team is experienced having navigated through several business and economic cycles, has deep industry knowledge, and long-standing client relationships providing DBRS Morningstar some confidence that HASI will make the appropriate adjustments to its business model to weather the current crisis.

HASI’s earnings generation ability is solid and credit performance has been strong. HASI has increasingly been taking on riskier exposures via mezzanine debt, real estate and equity investments, which could prove to be problematic in the current uncertain environment. While DBRS Morningstar sees the Company as having strong capabilities and expertise to evaluate/reward related to these investments, these assumptions may have significantly changed in recent weeks.

HASI’s funding is well-aligned with the investment portfolio. Its balance sheet encumbrance has been reduced with a senior unsecured issuance last year, enhancing the Company’s funding profile. HASI benefits from a diverse group of large institutional investors, primarily insurance companies and commercial banks that provide financing for non-recourse and off-balance sheet financings. These relationships will be tested given the current severely adverse environment.

HASI’s balance sheet leverage is modest, though increasing. The Company debt-to-equity ratio of 1.5x is up from June 2019 levels of 1.24x, but remains below HASI’s target limit of 2.5x.

ESG CONSIDERATIONS
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The principal methodology is the Global Methodology for Rating Non-Bank Financial Institutions, (September 2019), which can be found on our website under Methodologies & Criteria: https://www.dbrsmorningstar.com/research/ 350802/global-methodology-for-rating-non-bank-financial-institutions.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

The primary sources of information used for this rating include company documents and S&P Global Market Intelligence. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

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

DBRS Morningstar’s outlooks and ratings are under regular surveillance.

Generally, the conditions that lead to the assignment of a Negative or Positive trend are resolved within a 12-month period. DBRS Morningstar’s outlooks and ratings are under regular surveillance.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com.

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