Morningstar DBRS Comments on Capital Power Corporation’s Consent Solicitation for Subordinated Notes Series 1

DBRS Limited (Morningstar DBRS) reviewed Capital Power Corporation's (CPC or the Company) launch of a solicitation of consents (Consent Solicitation) from the holders of its 7.95% Fixed-to-Fixed Rate Subordinated Notes, Series 1 due September 9, 2082 (the Series 1 Notes). The Consent Solicitation seeks approval from the Series 1 Notes holders to amend the Series 1 Indenture to provide an exchange right to a new series (the Series 3 Notes). The Series 3 Notes will have the same terms and conditions as the Series 1 Notes except the Series 3 Notes have removed the provisions for the delivery of preferred shares upon the occurrence of certain bankruptcy and related events. This will ensure that the Series 3 Notes would rank pari passu with the 8.125% Fixed-to-Fixed Subordinated Notes, Series 2, due June 5, 2054 (the Series 2 Notes) upon the occurrence of certain bankruptcy events. The adoption of the amendments to the Series 1 Indenture is an extraordinary resolution and requires the approval of 66 2/3% of the outstanding principal amount of the Series 1 Notes. The deadline for the Consent Solicitation is 5:00 p.m. (ET) on August 14, 2024.

The Consent Solicitation follows CPC on June 5, 2024, issuing Series 2 Notes, which rank equally in right of payment with the Series 1 Notes except upon certain bankruptcy and related events. Upon certain bankruptcy and related events, the Series 1 Notes would automatically convert to preferred shares and then would rank below the Series 2 Notes. According to Morningstar DBRS’ Hierarchy Principle, as outlined in the Morningstar DBRS “Credit Ratings Global Policy,” the Series 1 Notes would be rated one notch below the Series 2 Notes, implying a downgrade to BB (low) from BB. At the time, CPC indicated to Morningstar DBRS that it would evaluate possible options including a Consent Solicitation to ensure that the Series 1 Notes and Series 2 Notes would rank pari passu in the event of insolvency. Because of this, Morningstar DBRS placed the Series 1 Notes Under Review with Developing Implications.

Morningstar DBRS notes that if the Consent Solicitation is approved, the Series 2 Notes would rank pari passu with the Series 3 Notes upon certain bankruptcy and related events and, as a result, the Series 3 Notes would have the same rating as the Series 2 Notes of BB with a Stable trend. Conversely, if the conversion is not approved and the Series 1 Notes do not rank pari passu with the Series 2 Notes upon bankruptcy, the rating on the Series 1 Notes would likely be downgraded one notch below that of the Series 2 Notes.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
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 (January 23, 2024) at https://dbrs.morningstar.com/research/427030.

Notes:
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 analyzes corporate finance transactions and how the methodologies are collectively applied can be found at: https://dbrs.morningstar.com/research/431153.

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.

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

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