OREANDA-NEWS. Fitch Ratings has assigned a 'BB' Issuer Default Ratings (IDR) for Canadian Solar Inc. (Canadian Solar). The Rating Outlook is Stable. A full list of ratings follows at the end of this release.

The 'BB' IDR reflects cyclicality of Canadian Solar's cash flows from photovoltaic (PV) solar module business, cost and market position in the PV solar module market, Fitch's expectations that the PV solar module business will remain free cash flow positive on a sustained basis, and cash flow stability and economics will improve from the planned downstream solar supply chain integration.

KEY RATING DRIVERS
Market Fundamentals: The solar PV market has witnessed sharp peaks and troughs over the last cycle. The module average selling price (ASP) and polysilicon prices have declined sharply over last three years, reflecting over capacity in the PV solar module supply chain along with the manufacturing efficiencies achieved. Fitch believes that the narrowing gap between module demand and supply, continued decline of polysilicon prices and projected manufacturing efficiencies could help achieve stable margins for Canadian Solar, at least through 2019.

Cost leadership is key in a declining ASP environment in Fitch's opinion. The assigned IDR reflects Fitch's expectation that Canadian Solar will continue to maintain its competitive advantage and market position in PV solar module manufacturing business. In addition, Fitch has assumed that Canadian Solar can increase its manufacturing footprint without a major increase in its cost structure.

Geographical Diversity: Multiple manufacturing locations and exposure to diverse end-user markets reduces single market risks for Canadian Solar. Fitch believes that expansion of government policy support in China, India, and other emerging markets will further strengthen Canadian Solar's pipeline of solar projects and help the company maintain its cost advantage. This could also offset any slowdown in the solar PV markets in the U.S. and other developed markets with the projected decline in government subsidies. However, rising proportion of EBITDA from emerging markets is a credit concern.

Technological Challenges: Solar PV technology continues to evolve and the barriers to entry are limited. The potential of new technologies that can reduce or eliminate Canadian Solar's competitive cost advantage is a rating concern. Fitch believes that downstream value chain integration mitigates short-to-mid-term technological risks as it provides time for the company to adopt new technologies and mitigate obsolescence risk.

Downstream Integration Positive: Canadian Solar's expansion into downstream supply chain business significantly improves its business profile. This allows the company to not only capture a larger share of economics of the solar energy segment, but also improve long-term cash flow visibility and stability by diversifying away from the cyclical PV solar module market.

The company's plans for launching a Yieldco are currently in flux given the turmoil in the Yieldco equities. Fitch expects the company to seek alternative ways to monetize its pipeline such as tax equity arrangements and partial sale of solar projects such as the recently announced sale of a 51% stake in Tranquillity solar project to the Southern Company. The company has several projects in early stage of development, which will require a large amount of investment to convert them into late stage projects. Consolidated capex over the next five years could exceed $4.5 billion, including about $1 billion for its PV module business. Fitch expects Canadian Solar to pace its capex in accordance with monetization opportunities available for its current late stage projects. In the event that Canadian Solar is able to launch its Yieldco successfully, its late stage pipeline of solar projects provides visibility on the drop down of assets to Yieldco for the next three to four years. Beyond that, the growth of the Yieldco would depend upon Canadian Solar's success in converting the early stage projects into firm opportunities. Fitch has assumed that Canadian Solar develops projects with committed long-term off-take arrangements with credit-worthy counterparties. An aggressive strategy pursued by the Yieldco or Canadian Solar to feed the distribution growth at the Yieldco is a potential concern and could have negative credit implications for Canadian Solar.

Leveraged Capital Structure: Fitch estimates Canadian Solar's adjusted recourse debt to EBITDAR ratio will range between 2.5x and 3.0x over the forecast period ending 2019. In calculating this metric, Fitch excludes the project level non-recourse debt and associated interest expense as well as EBITDA contribution and tax attributes from such projects and includes only the distributable cash flow. Fitch estimates the adjusted recourse debt at the end of 2019 to be about $1.3 billion that includes $450 million of debt at its energy segment business. On a consolidated basis, Fitch expects debt to consolidated EBITDA ratio to approximate 5x over the forecast period.

KEY RATING ASSUMPTIONS
--Fitch has assumed ASP range of $0.40/watt- $0.55/watt and the COGS range of $0.35/watt-$0.45/watt between 2016 and 2019.
--Fitch has assumed that the company will maintain $550 million in unrestricted cash balance over the forecast period (2016 - 2019).
--No dividends and or share buybacks over the next several years.
--Interest rate at 5.25%.

RATING SENSITIVITIES
Positive: Future developments that may, individually or collectively, lead to positive rating action include the following:
--Strong execution of the development pipeline that includes successful conversion of the early stage projects into firm opportunities, completion of the late stage solar projects without a material increase in leverage, and a monetization of late stage/ completed projects through formation of a Yieldco or a third-party sale;
--Adjusted recourse debt to EBITDAR leverage at 2.5x or lower.
Negative: Future developments that may, individually or collectively, lead to a negative rating action include the following:
--Negative government policy developments that adversely affect the economics of existing solar projects or those under development;
--Pressure on margins driven by an increase in polysilicon prices, inability to reduce costs in a declining ASP environment and/or oversupply of PV solar modules;
--Free cash flow deficit at the module business;
--Failure to convert existing pipeline of potential projects into firm opportunities;
--Aggressive acquisition or financial strategy at the proposed Yieldco and/or predominantly shareholder focused use of the sell-down proceeds;
--Shift in business mix towards more cyclical businesses; and
--Sustained weakening in adjusted debt to EBITDAR based leverage ratio to 3.5x or higher.

LIQUIDITY
As of June 30, 2015, Canadian Solar had about $1.03 billion in total liquidity, including $403 million in cash on hand. The company has about $2.05 billion in liquidity commitments under various credit facilities. Available liquidity is sufficient to meet funding needs over next 18-24 months. The company's restricted cash at the end of June 2015 was $614 million.

FULL LIST OF RATING ACTIONS

Fitch rates Canadian Solar Inc. as follows:

--Long-term IDR 'BB';
--Senior unsecured debt 'BB/RR4'.

The Rating Outlook is Stable.