OREANDA-NEWS. September 14, 2015. Fitch Ratings has revised the Outlook on Andromeda Finance S.r.l.'s (Andromeda, the project) class A2 notes and the underlying rating (without the benefit of SACE guarantee) of the class A1 notes to Stable from Negative and affirmed them at 'B'. Fitch has also affirmed the class A1 notes at 'A-' (with the benefit of a SACE guarantee) with a Stable Outlook, in line with SACE's rating.

The rating actions reflect the stable operational performance of the assets as well as steady financial metrics following the implementation of retroactive changes to the fixed feed-in-tariffs (FIT). Notably, the project concluded its fifth operational year in August 2015 with production being 8.8% above P50. The annual debt service coverage ratio (DSCR) as of March 2015 was 1.36x.

The Stable Outlook is also supported by measures undertaken by the company on the cost side to strengthen its credit profile and mitigate the negative impact of regulatory changes. Consequently, the costs of the operation and maintenance (O&M) contract were reduced by 40%. Lastly, certain recently introduced taxes have been abolished leading to the project receiving some reimbursements.

KEY RATING DRIVERS
Revenue Risk (Price) - Weaker
Approximately 86% of total project revenues under Fitch's base case stem from the FIT (EUR318/MWh from January 2015 following the 8% reduction enacted by the Italian government in 2014) under the Italian regulatory framework for solar plants (Conto Energia). The remaining revenues are generated from electricity sales at market prices, which averaged EUR46.5/MWh during the 12 months ending June 2015. Both revenue streams are received from the Italian public authority Gestore Dei Servizi Energeticci (GSE). The reduction in the FIT makes the project cash flow marginally more sensitive to market prices movements. The rated debt could not be fully serviced by revenues from the FIT alone.

Revenue Risk (Volume) - Midrange
The project has five years of operating history and production performance remains strong. The project has consistently produced in excess of the P50 level by an average of 7.7%. Notwithstanding the solid energy production performance, Fitch has revised its assessment of Revenue Risk (Volume) to Midrange from Stronger in line with its updated 'Rating Criteria for Solar Power Projects'.

Operating Risk - Midrange
The technology (monocrystalline photovoltaic (PV) panels) is well established and the operating requirements for the PV plants are straightforward. SunPower is the equipment manufacturer and the operator. Although SunPower is regarded as an experienced contractor, it is not rated. The terms of the fixed-price O&M contract were revised earlier in 2015 in favour of the project company. The new contract price is 40% lower and capital replacement costs are now included in the scope of required works. These savings are part of the company's cost-cutting policy and have a positive impact on the forecast cash flow profile.

Debt Structure - Midrange
The transaction is a project finance structure with some elements of a securitisation, which positions the noteholders further away from the cash flows generated at the project company level. However, the project documentation is well structured and the debt terms are relatively straightforward with two fixed rate fully-amortising senior tranches ranking pari-passu, no interest risk and no refinancing risk.

Debt Service
The company reported a DSCR of 1.36x as of March, 2015, which was above Fitch's expectations of 1.2x. The ratio above forecast was achieved due to higher than expected actual market prices (EUR47/MWh compared with EUR40.5/MWh) and production levels (18,599MWh compared with 17,223MWh). Fitch's projected financial performance has slightly improved compared with the last review. The average projected DSCR is 1.14x (1.07x previously) under the Fitch base case and 1.0x (from 0.95x) under the Fitch rating case. This is primarily the result of the new O&M arrangements.

The new payment mechanism may create some liquidity stress on the project's cash flows on future debt repayment dates. However, Fitch expects this risk to be mitigated by the company's prudent cash management.

The transaction continues to be in the distributions lock-up since 30 September 2014 until average DSCR and LLCR metrics are restored above the covenanted levels.

RATING SENSITIVITIES
Negative:
- Electricity generation persistently below the P50 estimate, or below the 1y P90 estimate for several periods.
- Higher than expected failure rates or operating costs; further declines in electricity market prices.
- Material adverse changes in the regulatory framework affecting PV installations.

Positive:
- Recovery of electricity market prices supported by revised market advisor's forecast.

SUMMARY OF CREDIT
The transaction is a securitisation of two project loans (Facility A1 and Facility A2) under law 130/99 (the Italian securitisation law). The loan facilities were extended by BNP Paribas and Societe Generale to Andromeda PV S.r.l. (the project company) to build and operate two PV plants of 45.1MW and 6.1 MW (a total 51.2MW) in Montalto di Castro, Italy. The terms of the loans effectively mirror those of the rated notes, with payments under Facility A1 and Facility A2 servicing the class A1 notes and class A2 notes, respectively. The class A1 notes' rating and Outlook reflect the first-demand, irrevocable and unconditional guarantee provided by SACE. The guarantee provided by SACE to the issuer is in respect of the project company's obligations under Facility A1 and not on the class A1 notes directly.