Moody’s downgrades ACWA Power Management and Investments One Limited’s senior secured debt rating to Ba1 from Baa3; outlook stable

 Moody’s Investors Service (“Moody’s”) has downgraded to Ba1 from Baa3 the rating on the US$ 814 million of 5.95% fixed rate amortising senior secured bonds due in December 2039 (the Bonds) issued by ACWA Power Management and Investments One Limited (APMI One, the Issuer). The outlook remains stable.

The rating action follows a number of changes within the portfolio of underlying project companies during the course of H1 2022. This includes:

(1) Refinancing / releveraging of project debt at Rabigh Arabian Water and Electricity Company (“RAWEC”), which has increased project level debt from SAR 2,863 million (USD 763 million) to SAR 5,231 million (USD 1,395 million), resulting in lenders to APMI One being subordinated to a higher level of debt at the project level, lower cover ratios at RAWEC, and a smaller buffer to lock-up covenants.

(2) The sale of Shuqaiq Water and Electricity Company (“SQWEC”), which has reduced the diversification of APMI One cashflows. In order to offset the impact of lost cashflows from SQWEC, ACWA Power increased the stake in RAWEC that forms part of APMI One bondholder security and cashflows from 37% to 80%. While this offsets the cashflow impact of the sale of SQWEC, it results in greater concentration at RAWEC, for which we view the offtaker as of lower credit quality than for others in the portfolio.

More generally, APMI One’s senior secured rating of Ba1 reflects, as positives (1) relatively stable and predictable revenue streams underpinned by long term availability-based offtake contracts; (2) the projects being important  infrastructure assets for the Kingdom of Saudi Arabia (KSA); (3) the projects using proven technologies from reputable suppliers; (4) the projects all being operational and, generally, having a good operating track record; and (5) some diversification of cashflows from six separate projects and ACWA Power’s wholly owned operations and maintenance (O&M) subsidiary NOMAC.

However, the rating is constrained by (1) structural subordination of the Bonds relative to individual asset level project finance debt, (2) the inclusion of cashflows from the O&M company in the structure supporting the Bonds, which exposes the cashflows to the risk of operating cost volatility; (3) growing concentration of cashflows between 2031 and debt maturity in 2039 to a single underlying project (RAWEC), where we view the credit quality of the offtaker as lower than offtakers for the other portfolio companies; (4) risk of refinancing at underlying project companies or other entities within the company structure, in the event that it results in cashflows to APMI One that are less diverse or from counterparties of lower credit quality or greater subordination of lenders to APMI One; and (5) a lack of security over the underlying project entities.

RATING OUTLOOK

The outlook is stable, reflecting Moody’s view that power and water availability metrics at the project companies and NOMAC’s O&M performance will be stable and debt service coverage ratios will be in line with Moody’s base case.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATING

Moody’s could upgrade the rating if (1) sustained, consistent operating performance of the underlying projects and NOMAC results in materially stronger financial metrics than those in the Moody’s base case; (2) our view of the credit quality of the offtaker to RAWEC were to improve materially; or (3) other changes to the portfolio were to result in greater diversification of APMI One cashflows and/or increase cashflows from strong credit quality counterparties.

Moody’s could downgrade the rating if (1) poor operational performance or other developments, such as higher leverage, at one or more Project Company or NOMAC materially reduces distributions or results in deeper subordination of lenders to APMI One; (2)  changes to the portfolio assets materially reduces diversification of APMI One cashflows; or (3) our view of the weighted average credit quality of offtakers deteriorates.

PRINCIPAL METHODOLOGY

ACWA Power Management and Investments One Limited is a limited company incorporated under the laws of the Dubai International Financial Center (the “DIFC”). APMI One is a wholly owned subsidiary of ACWA Power, a joint stock company established under the laws of the Kingdom of Saudi Arabia with 11.67% of its shares listed on the Tadawul stock exchange. ACWA Power is a Saudi Arabian company which is a private developer of, investor in and operator of a portfolio of power generation and water desalination plants.

In May 2017, APMI One raised US$ 814 million 5.95% senior secured bonds due December 2039 (the Bonds), which was used to (i) prepay certain existing loan facilities of the “Restricted Companies”, (ii) prepay certain existing loan facilities of ACWA Power entities that were not Restricted Companies, (iii) for general corporate purposes of the ACWA Power Group entities including entities which may not be Restricted Companies; and (iv) pay fees, costs and expenses, related to the Bonds.