Morningstar DBRS Downgrades Long-Term Credit Ratings on Acciona S.A. and Acciona Financiación Filiales, S.A. to BBB (low), Stable

DBRS Ratings GmbH (Morningstar DBRS) downgraded the Issuer Rating and the Short-Term Issuer Rating on Acciona, S.A. (the Company) to BBB (low) from BBB and to R-2 (low) from R-2 (middle), respectively. Morningstar DBRS also downgraded the credit rating on Acciona Financiación Filiales, S.A.'s existing Euro Medium Term Notes programme to BBB (low) from BBB. The trend on all credit ratings is Stable.

KEY CREDIT RATING CONSIDERATIONS
The credit rating downgrades reflect the negative rating action on Acciona Energía from BBB (high) to BBB as a consequence of increasing financial leverage expected for the next three years, in an environment of lower energy prices coupled with the ambitious growth plan the Company is developing for a few years now to increase the installed capacity in the energy division. In addition, the equity commitments in the Infrastructure business to enhance the concessional activity will add some pressure to the credit metrics.

Acciona's credit ratings are largely based on Corporación Acciona Energías Renovables's (Acciona Energía) credit ratings and on a rating assessment of Acciona's Infrastructure Division, adjusted for structural subordination, leverage at the non-energy business level. Over the forecast horizon to 2026, excluding the Company's non-core activities, the EBITDA contribution from Acciona Energía is expected to decrease to around 60% while the infrastructure business is expected to comprise around 40% of total EBITDA.

The Stable trend on Acciona's credit ratings reflects the recurrent cash flow generated by the regulated electricity generation and PPA/hedges for nonregulated assets, the limited merchant exposure in the energy business, the increasing cash flow expected from the infrastructure business supported by a strong backlog, and the active management of Acciona Energía, which is working on several projects to control the rising debt, showing a strong commitment to keep the investment-grade rating.

The credit rating considers Morningstar DBRS' view that: (1) Acciona retains a 83.774% ownership in Acciona Energía and is committed not to lower its stake to below 70%, (2) continues to benefit from substantial EBITDA and cash flow contributions from Acciona Energía; (3) the credit quality of the Group's infrastructure division, although it is considered as investment grade, is weaker than the Group's regulated and nonregulated generation businesses and limits the Group's ratings; however, Morningstar DBRS expects the increasing investment in concessional assets to support the infrastructure earnings in the future and partially mitigates the construction risk; (4) credit metrics at Acciona will deteriorate as a consequence of the rising level of debt but will support the BBB (low) credit ratings; (5) Acciona's credit ratings are one notch lower than Acciona Energía´s credit ratings and reflect structural subordination of Acciona's debt compared with Acciona Energía´s debt; and (6) the liquidity position of the Group is considered to be neutral considering the high committed capex expected and lower cash flow generation balanced by significant cash on hand, committed credit lines, and access to the debt and equity capital markets.

CREDIT RATING DRIVERS
Morningstar DBRS considers a positive credit rating action in the medium term to be unlikely. However, Morningstar DBRS could take a negative credit rating action as a consequence of (1) significant delays in executing the asset rotation plan at Acciona Energía to partly mitigate the significant weakening of its balance sheet; (2) considerable project delays and cost overruns associated with developments under construction in the energy and/or infrastructure business; (3) heightened regulatory risk; or (4) a decline in credit metrics to below Morningstar DBRS' required levels for the current credit rating, for example with a cash flow-to-net debt below 10.0% and net debt-to-capital above 42.0% on a sustained basis and without the implementation of financial remedies.

EARNINGS OUTLOOK
Looking ahead, Morningstar DBRS expects Acciona's revenues and EBITDA to slightly increase during the period 2024-26 with the lower energy prices partially offset by the increasing construction activity and by the positive contribution from Nordex. In addition, Morningstar DBRS notes that the asset rotation strategy developed by Acciona Energía would significantly boost profits over the next four years to partially support the energy growth plan. However, Morningstar DBRS notes there are some execution risks in the divestment of energy assets.

FINANCIAL OUTLOOK
Due to the lower cash flow generation from Acciona Energía and high level of capex for the next three years for both the energy and the infrastructure divisions, Morningstar DBRS expects a higher level of debt, with a peak in 2024, that will put pressure on credit metrics over the next years. Although Morningstar DBRS considers the asset rotation plan could significantly mitigate the rising debt, there are some concerns about the quick execution of the strategy. Cash flow-to-adjusted debt is expected to remain slightly below 15% between 2024 and 2025. Adjusted debt-to-capital is expected to stay above 40% during the next three years.

CREDIT RATING RATIONALE
Acciona's credit ratings are supported by the (1) stable cash flows from regulated generation assets in Spain; (2) long-term contracts for its international generation assets; (3) strong construction, operational, and technical expertise; (4) geographic and business diversification; (5) stable cash flow from service activities in water, concessions, and other services; and (6) substantial infrastructure backlog for growth. Acciona's credit ratings are constrained by the Company's (1) capex intensity and project development risk; (2) exposure of nonregulated generation to price volatility in the long term; (3) exposure of construction activities to potential cost overruns and long lead times; (4) operational risk; (5) currency and interest risk; and (6) intense competition.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factor(s) that had a significant or relevant effect on the credit analysis.

A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (23 January 2024) at https://dbrs.morningstar.com/research/427030.

BUSINESS RISK ASSESSMENT (BRA) AND FINANCIAL RISK ASSESSMENT (FRA)
(A) Weighting of BRA Factors
In the analysis of Acciona, the BRA factors are considered in the order of importance contemplated in the methodology.

(B) Weighting of FRA Factors
In the analysis of Acciona, the FRA factors are considered in the order of importance contemplated in the methodology.

(C) Weighting of the BRA and the FRA
In the analysis of Acciona, the BRA carries greater weight than the FRA.

Notes:
All figures are in euros unless otherwise noted.

Morningstar DBRS applied the following principal methodologies:
-- Global Methodology for Rating Companies in the Regulated Utility and Independent Power Producer Industries (27 June 2024), https://dbrs.morningstar.com/research/435127
-- Global Methodology for Rating Companies in the Construction and Property Development Industry (25 June 2024), https://dbrs.morningstar.com/research/434735

Morningstar DBRS credit ratings may use one or more sections of the Morningstar DBRS Global Corporate Criteria (15 April 2024), https://dbrs.morningstar.com/research/431186, which covers, for example, topics such as holding companies and parent/subsidiary relationships, guarantees, recovery, and common adjustments to financial ratios.

The following criteria has also been applied:
-- Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (23 January 2024), https://dbrs.morningstar.com/research/427030

The credit rating methodologies used in the analysis of this transaction can be found at: https://dbrs.morningstar.com/about/methodologies.

A description of how Morningstar DBRS analyses corporate finance transactions and how the methodologies are collectively applied can be found at: https://dbrs.morningstar.com/research/431153.

The primary sources of information used for these credit ratings include audited financial statements, financial results, management forecast and presentations. Morningstar DBRS considers the information available to it for the purposes of providing these credit ratings to be of satisfactory quality.

Morningstar DBRS does not audit the information it receives in connection with the credit rating process, and it does not and cannot independently verify that information in every instance.

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

For further information on Morningstar DBRS historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: https://registers.esma.europa.eu/cerep-publication. For further information on Morningstar DBRS historical default rates published by the Financial Conduct Authority (FCA) in a central repository, see https://data.fca.org.uk/#/ceres/craStats.

The sensitivity analysis of the relevant key credit rating assumptions can be found at: https://dbrs.morningstar.com/research/436845.

These credit ratings are endorsed by DBRS Ratings Limited for use in the United Kingdom.

Lead Analyst: Laura Gutierrez, Assistant Vice President
Rating Committee Chair: Anke Rindermann, Managing Director
Initial Rating Date: April 23, 2020
Last Rating Date: August 8, 2023

Information regarding Morningstar DBRS ratings, including definitions, policies, and methodologies, is available on dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.

DBRS Ratings GmbH, Sucursal en España
Paseo de la Castellana 81
Plantas 26 & 27 28046 Madrid, Spain
Tel. +34 (91) 903 6500

DBRS Ratings GmbH
Neue Mainzer Straße 75
60311 Frankfurt am Main Deutschland
Tel. +49 (69) 8088 3500
Geschäftsführer: Detlef Scholz
Amtsgericht Frankfurt am Main, HRB 110259