DBRS Morningstar Assigns Provisional Ratings of BBB with Stable Trends to Lièvre Power Holdings LP

DBRS Limited (DBRS Morningstar) assigned a provisional Issuer Rating of BBB to Lièvre Power Holdings LP (the Issuer or HoldCo) and provisional ratings of BBB to the Series A Bonds and Series B Bonds (together, the HoldCo Bonds) to be issued by HoldCo. All trends are Stable. The Issuer is a single-purpose vehicle established to issue the HoldCo Bonds with proceeds to partially refinance Lièvre Power Financing Corporation's (rated BBB (low) with a Stable trend by DBRS Morningstar) existing debt of $225 million (the OpCo Notes) and make advances to affiliates, for distributions, and for general corporate purposes. HoldCo directly and wholly owns Lièvre Power L.P. (OpCo), which guarantees the OpCo Notes. On the First Closing Date expected on December 29, 2021, $1,014.7 million of Series A Bonds will be settled, while $125.3 million of Series B Bonds will also be settled to partially exchange for the OpCo Notes. On the Second Closing Date of October 6, 2025, the remaining OpCo Notes of $99.7 million will be refinanced at the HoldCo level. The total amount of the HoldCo Bonds and OpCo Notes is $1,239.7 million. The HoldCo Bonds will rank pari passu and partially amortize over a 40-year period to mature on December 31, 2061, with an aggregate balloon amount of $367.8 million, subject to refinancing. The total debt amount is sized to a minimum consolidated debt service coverage ratio (DSCR) of 1.40 times (x).

OpCo owns and operates a portfolio of four hydroelectric generating facilities of 263 megawatts on the Lièvre River in Québec (the Project). Starting on January 1, 2022, all of OpCo's power generation products will be sold to a high investment-grade offtaker under primarily an annually escalated fixed-price power purchase agreement (PPA). The term of the PPA extends until at least the maturity of the HoldCo Bonds. Therefore, debt service is underpinned by the contracted cash flow. Based on the forecast long-term average generation, the minimum consolidated DSCR of 1.40x is consistent with that of contracted hydro assets in DBRS Morningstar's BBB-rating universe. Furthermore, the provisional ratings are constrained by the refinancing risk after 2061. The Project appears to be well positioned for recontracting at debt maturity because of its competitive advantage with significant storage capacity and transmission flexibility. Nonetheless, DBRS Morningstar believes that future recontracting 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 ratio (PLCR) of more than 2.0x at the P90 generation level still indicates 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 debt, but merely assesses the probability of a successful refinancing based on the Project's remaining economic value at the refinancing point.

The transaction strengths include (1) fully contracted cash flow with a highly rated offtaker, (2) low cost hydro assets with a reliable operating history and significant storage capacity, and (3) flexible transmission interconnections to multiple power markets. The challenges include (1) refinancing risk, (2) future capital expenditure (capex) risk, and (3) hydrology risk. The HoldCo Bonds are structured as a typical 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, each of which will be funded by a letter of credit (LOC) facility that ranks pari passu with the HoldCo Bonds, and a Liquidity Reserve Account to be funded by cash or nonrecourse LOCs. Between January 1, 2022, and October 6, 2025, the HoldCo Bonds are structurally subordinated to the remaining OpCo Notes that are not exchanged. However, this risk is not considered significant because (1) the OpCo Notes represent only 8% of total debt; (2) ample residual cash flow is left for the HoldCo Notes after debt service of the OpCo Notes, and (3) bifurcated and equal rights to the cash flow are granted under the PPA through a Co-Ownership Agreement between OpCo and HoldCo on a proportionate basis. On the Second Closing Date, the structural subordination will be eliminated and the HoldCo bondholders will have the benefit of an OpCo guarantee secured by a first-ranking security package over the assets. HoldCo and OpCo are subject to customary separateness covenants in the Trust Indenture. DBRS Morningstar relied solely on the separateness features and takes comfort in that HoldCo and OpCo will remain legally and operationally separate and apart from the Sponsor, Brookfield Renewable Partners L.P. (rated BBB (high) with a Stable trend by DBRS Morningstar), and any of the Sponsor’s affiliates. DBRS Morningstar notes that it will not receive a substantive nonconsolidation legal opinion for this transaction.

A rating upgrade is unlikely unless satisfactory renewal or replacement of the PPA occurs well before the debt maturity date. A negative rating action may be triggered by heightened refinancing risk, especially toward debt maturity, and/or a material and sustained deterioration of credit metrics and/or asset quality.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.

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

The principal methodology is Rating Project Finance (August 18, 2021; https://www.dbrsmorningstar.com/research/383185), which can be found on dbrsmorningstar.com under Methodologies & Criteria. Other applicable methodologies include the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (February 3, 2021; https://www.dbrsmorningstar.com/research/373262).

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 [email protected].

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.

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

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at [email protected].

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