OREANDA-NEWS. February 16, 2015. Fitch Ratings has downgraded UK-based Viridian Group Investments Limited's (VGIL) Long-term Issuer Default Rating (IDR) to 'B+' from 'BB-' and removed it from Rating Watch Negative (RWN) following the completion of its refinancing exercise. Fitch has also assigned Viridian Group Fundco II Limited's (VGFII) EUR600m senior secured notes a final rating of 'B+' and Viridian Group Limited's (VGL) and Viridian Power and Energy Holdings Limited's (VPEHL) GBP225m super senior revolving credit facility (RCF) a final senior secured rating of 'BB+'. The 'BB' rating on the EUR313m and USD250m senior secured notes due 2017 and the 'BB+' rating on the EUR225m super senior RCF due 2016 have been withdrawn as these notes have been repaid in full. The Outlook on the IDR is Stable.

The EUR600m senior secured notes issue proceeds were used to redeem the EUR313m and USD250m senior secured notes due 2017 (GBP357m equivalent) and drawings under the super senior RCF due 2016 (GBP23m). Proceeds were also used to pay down GBP64m of the subordinated shareholder loan, which is currently classified as an equity-like PIK instrument by Fitch, and is thus not included in debt-based metrics for the restricted group. In turn the proceeds from the repayment of the shareholder loan were used to partly repay junior debt obligations outside the restricted group.

The downgrade of VGIL's IDR is driven by the completed refinancing, which has resulted in an increase of VGIL's forecast funds from operations (FFO)-adjusted net leverage to 4.7x in FY15 and around 4.3x on average for FY15-FY17 (financial year end March). The interest coverage is forecast to improve to 2.3x in FY15 and around 2.5x on average for FY15-FY17. We expect leverage to eventually improve to somewhat below 4x by FY17 due to positive free cash flow (FCF) generation. However, this is subject to investments in renewable assets, uncertainty of growth in customer energy supply and the trading environment for its power generation segment.

KEY RATING DRIVERS
Medium-Term Deleveraging Expected
Fitch expects VGIL's FFO-adjusted net leverage to peak at 4.7x in FY15, compared with 3.6x in FY14, before declining to around 3.6x in FY17. The immediate increase in leverage is due to the issue of senior secured notes to redeem the existing senior secured notes (due 2017), to part repay the non-restricted group's PIK and to fund refinancing costs. The deleveraging that we expect to follow will be supported by projected positive FCF after FY15. Fitch has assumed no dividends will be paid until the restricted payment clause of consolidated net debt/EBITDA of 3.5x is achieved.

Interest cover is forecast to improve to around 2.3x in FY15 from 1.8x in FY14. This is due to a lower forecast cost of debt compared with previous debt instruments. This improvement means that the interest cover ratio has ceased to be a major constraining factor for the ratings.

Weak Business Risk Profile
While VGIL's ratings are supported by predictable earnings from its regulated and quasi-regulated activities, its business risk profile is offset by a light and concentrated asset base, potential regulatory risk and increasing competition in retail operations. VGIL's regulated retail supply and power procurement businesses generated about 30% of EBITDA in FY14, although regulation of this sector is not comparable with that of transmission or distribution networks. VGIL's quasi-regulated earnings, which represented another 23% of EBITDA for FY14, are supported by capacity payments for its combined cycle gas turbine (CCGT) plants.

At the same time, the business risk profile is restricted by its two closed-cycle gas turbines of limited generation size, which are currently operating at low or close to 0% constrained utilisation as a result of low spark spreads and their mid-to-low merit order. Fitch notes low downside risk in the generation segment given low utilisation levels and the support from the capacity payments. Regulatory risk stems from the changes that are being considered to the wholesale electricity trading market and capacity payment calculation. The retail operations are under pressure from increased market competition.

Varying Recovery Expectations
The issued EUR600m senior secured notes are subordinated to the GBP225m super senior RCF, which constitutes a cash facility of up to GBP100m and a letter of credit facility. The notes are also subordinated to a maximum GBP70m of hedging liabilities, which have first priority ranking over the security. The rating of the RCF is notched up three levels from the 'B+' IDR due to its high recovery prospects (RR1), while the senior secured bond is rated at the same level as the IDR, given average recovery prospects (RR4). VGIL's asset profile is light and unique relative to other utilities, with mostly contractual revenue streams in place.

Weaker Covenant Package
VGIL's bondholders benefit from share pledges and guarantees from restricted group companies, and from fixed and floating charges over certain assets. Bondholders also benefit from a limitation of indebtedness test with a fixed charge coverage of 2x and a senior secured leverage test of 4x, up from 3x in the previous notes, with a higher carve out totalling GBP50m. Viridian is also allowed by the bond documentation to make GBP70m of investments in renewable assets, which may be debt-funded. The company can exceed 4x debt incurrence by drawing on the RCF or issuing senior unsecured notes.

KEY ASSUMPTIONS
Fitch's key assumptions within our rating case for the issuer include:
- Near-zero utilisation assumed for Huntstown for FY15-FY18.
- System marginal price growth of approximately 3% per annum on average for FY15-FY18.
- Margins in the competitive Energia supply business are forecast to be under pressure over the rating horizon due to increased competition.
- Margins in the currently regulated Power NI business are expected to improve over the rating horizon due to prospective de-regulation.
- EBITDA growth of the renewable PPA segment is assumed at around 11%-12 % per annum, driven mainly by new capacities coming on stream.
- Capex reflects predominantly investments in renewable assets and is funded from the internally generated cash flow. Average capex spending assumed at around GBP37m per annum for FY15-FY18.

RATING SENSITIVITIES
Positive: We could consider a positive rating action should FFO adjusted net leverage decrease below 4x on a sustained basis and FFO interest cover trend towards 3x.

Negative: Further repayments on the obligations outside the restricted group or significant investments in the assets outside the restricted group, not supported by the appropriate dividend stream would be negative for the rating. We could consider a negative rating action if FFO adjusted net leverage weakens further to above 5x and FFO interest cover falls below 2x on a sustained basis.

LIQUIDITY AND DEBT STRUCTURE
Liquidity is adequate as debt maturities were extended to 2020 as part of the refinancing. Liquidity is further supported by positive projected free cash flow after FY15 and a fully undrawn RCF of GBP100m.

FULL LIST OF RATING ACTIONS

Viridian Group Investments Limited
- Long-Term IDR: downgraded to 'B+' from 'BB-'; off RWN; Outlook Stable

Viridian Group Fundco II Limited
- Senior secured rating: assigned at 'B+', 'RR4'

Viridian Group Limited
- Senior secured rating: assigned at 'BB+', 'RR1'

Viridian Power and Energy Holdings Limited
- Senior secured rating: assigned at 'BB+', 'RR1'