OREANDA-NEWS. Fitch Ratings has downgraded CRC Breeze Finance S.A.'s (Breeze 2) class A and B bonds as follows:

EUR300m class A (XS0253493349) downgraded to 'B-' from 'B', Outlook Stable
EUR50m class B (XS0253496441) downgraded to 'CC' from 'CCC'

The downgrade of the class A notes reflects Fitch's view that the senior notes are vulnerable to the volatile and generally weak wind conditions and to the risk of increased operating costs. Fitch's base case anticipates coverage close to breakeven for the class A notes (average DSCR of 1.0x), which highlights the limited remaining margin of safety.

The 'CC' rating indicates that the class B notes are subject to a very high level of credit risk and full repayment appears unlikely. The class B notes will reach maturity in May 2016. However, no payment default in accordance with the terms of the documentation is imminent as Fitch understands that the class B notes will not cease to exist and cash available after class A debt service will continue being paid to the class B notes until the class A notes reach final maturity.

KEY RATING DRIVERS
Operation Risk: Weaker
Breeze 2's technical performance has generally been strong, with annual turbine availability at and even exceeding Fitch's expectation of 96.5%.

After initial underestimation of operating costs, Breeze 2 has also demonstrated effective cost control in recent years. Nevertheless, the key operational risk remains an increase in maintenance and repair costs as the turbines age. In Fitch's base case, operating costs increase by 5% for the wind farms after their 15th year of operation. In Fitch's rating case, operating costs increase by an additional 10% throughout.

The recent management change at the Breeze 2 issuer level from Theolia to wpd windmanager AG introduces additional uncertainty. Fitch will monitor the development of cost budgets and cost control closely and may adjust its assumptions accordingly.

Revenue Risk- Volume: Weaker
The initial wind study grossly overestimated the project's wind resource and as a result a new study was prepared in 2010, which revised down the wind forecast by 17%. However, actual wind yield is lower than the revised P50 level. Consequently, Fitch has reduced its estimates bringing its base case energy production forecast in line with the average production since commencement of operation and its rating case estimate to the level of the weakest year to date. As a consequence of the low wind yield, the project's liquidity remains tight and Fitch does not expect it to materially improve.

Furthermore, the variability of wind yield during the year, coupled with the uniform principal repayment amount at the May and November payment dates, has resulted in the company being unable to service its class B notes fully at the November payment date.

Revenue Risk - Price: Midrange
The wind farms are remunerated through fixed feed-in-tariffs embedded in German and French energy regulations. Limited exposure to merchant prices (approximately 10% of the portfolio's generation capacity increasing to 23% at the last payment date) during the last three to four years is mainly the result of the shorter period over which French tariffs are fixed (15 years from the commencement of operation compared with 20 years for German projects).

Debt Structure: Class A - Midrange; Class B - Weaker
Payments on the class B notes are deferrable and fully subordinated to the payment of interest and repayment of principal on the class A notes. The amount currently deferred on the class B notes is EUR23.4m. The borrower will not be in a position to pay back this amount, or possible future additional deferred amounts, unless energy production consistently and materially exceeds the historical average.

Due to the class A debt service reserve account's (DSRA) structural subordination to class B debt service, the class A debt reserve will not be replenished (EUR2.2m was drawn in 2009, EUR10.9m remains outstanding) as long as class B deferrals remain outstanding. The class B DSRA was fully eroded in 2009.

PEER ANALYSIS
The closest peer, Breeze Finance S.A. (Breeze 3), is rated 'B-'/Stable for class A and 'CC' for class B, and has similar rating drivers.

RATING SENSITIVITIES
Negative: The ratings of the class A and B notes at 'B-' and 'CC' highlight the proximity of the bonds to default and as such are inherently volatile and subject to further downgrade risk. In particular, the ratings could be downgraded as a result of weak wind conditions, a material decline of the turbines' availability and/or a lasting increase in O&M costs above current expectations causing further draw-downs of class A DSRA.

Positive: An upgrade at this point appears highly unlikely, although wind yield consistently at or above P50 enabling the project to repay the deferred class B principal could lead to an upgrade.

SUMMARY OF CREDIT
Breeze 2 is a Luxembourg special purpose vehicle that issued three classes of notes on 8 May 2006 for an aggregate issuance amount of EUR470m to finance the acquisition and completion of a portfolio of wind farms located in Germany and France, as well as establishing various reserve accounts. The notes are scheduled to be repaid from the cash flow generated by the sale of the energy produced by the wind farms, mainly under regulated tariffs.

Fitch's revised base case projections assume production will be in line with the average of historical production over the past seven years (495,426Mwh p.a.). Projections further assume declining revenues as wind farms roll off their fixed feed-in-tariffs from 2021 and plant availability falls consecutively, in addition to moderate expense growth. Due to the seasonal production and the uniform debt service requirements, the semi-annual DSCR profile shows significant differences between the spring and the autumn payment date. Projected metrics indicate a high risk of coverage falling below below 1.0x for class A at the autumn payment date, which would result in the gradual draw-down of the class A DSRA eroding the limited cash cushion remaining for the class A notes before a payment default.

Fitch's rating case scenario assumes production will be 10% below the Fitch base case (445,8849Mwh p.a.), in line with the minimum of historical production over the past seven years. It further assumes operating expenses 10% above that of Fitch's base case. The rating case is a downside scenario, which demonstrates the impact of low production levels expected to occur in a single year rather than on a continuous basis. The current ratings are predominately informed by Fitch's base case.

The average annual DSCR are 1.00x/ 0.92x for senior and total debt respectively, under the Fitch base case. They are 0.78x/ 0.71x under the Fitch rating case.