OREANDA-NEWS. Fitch Ratings has downgraded Breeze Finance S.A.'s (Breeze 3) class A notes and affirmed the class B notes, as follows:

EUR287m class A (XS0294895999) downgraded to 'B-' from 'B'; Outlook Stable
EUR84m class B (XS0294895726) affirmed at 'CC'

The downgrade of the class A notes reflects our view that there is an increased vulnerability to volatile yet generally weak wind conditions. The downgrade also reflects the risk of increased operating costs. Fitch's base case production assumptions are based on the historical average production achieved over the past seven years. The revised Fitch base case results in an average DSCR of 1.04x. Thus capacity for continued payment is vulnerable to cost increases and volatility of the wind yield and we expect draw downs on the debt service reserve account.

The 'CC' rating reflects that the class B bonds continue to defer principal and interests and are increasingly unlikely to be fully repaid by the final maturity in 2027.

KEY RATING DRIVERS
Operations Risk: Weaker
The key operational risk is the increase of operating costs as the turbines age. Average achieved availability across the portfolio was 97.0% in 2014 and 96.8% in 1H15, broadly in line with Fitch's expectations. Operating costs were EUR15.6m in 2014, or EUR44.9 per MW. The company is entering into full service contracts, which translate into higher costs but should provide greater cost certainty. Fitch will monitor the development of operating costs and calibrate its assumptions accordingly.

Revenue Risk - Volume: Weaker
The project continues to suffer from weak wind conditions, which are the main driver of the project's tight liquidity position. Coupled with seasonality in the wind resource and the uniform principal repayment amount at the April and October payment dates, this results in tight debt service coverage at the October payment date.

Revenue Risk - Price: Midrange
The German wind farms represent 90% of the portfolio and benefit from fixed feed-in-tariffs for 20 years. The French fixed tariffs apply only for 15 years and thus the portfolio is exposed to price risk (approximately 7% of generation capacity in 2023 increasing to 30% in 2026) in the last four years before debt maturity. Fitch considers the regulatory support framework in Germany and France as stable.

Debt structure - Class A: Midrange; Class B: Weaker
Class B debt service is fully subordinated to class A debt service and can be deferred (EUR30.9m currently deferred). 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. Class B has fully exhausted its DSRA and replenishment is unlikely. There was one withdrawal from class A DSRA, in 2014, of EUR1m. This reserve has not been used since then and its replenishment is subordinated to class B debt service. There is no formal major maintenance reserve.

PEER ANALYSIS
The closest peer is CRC Breeze Finance (Breeze 2), which has similar rating drivers and debt service metrics. Its class A notes are rated 'B-'/Stable for class A and class B notes at 'CC'.

RATING SENSITIVITIES
Negative: The class A and B notes' ratings at 'B-' and 'CC', respectively, highlight the proximity of the bonds to default and as such are inherently volatile and subject to further downgrade risk. In particular, the rating 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 may lead to an upgrade.

SUMMARY OF CREDIT
Breeze 3 is a Luxembourg SPV that issued three classes of notes on 19 April 2007 for an aggregate issuance amount of EUR455m 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 repaid 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 that production will be in line with the average of historical production over the past seven years (521,569Mwh p.a.). Projections further assume declining revenues as wind farms roll off their fixed feed-in-tariffs from 2020 and that plant availability falls consecutively in addition to moderate expense growth. Due to the seasonal production and the uniform debt service requirements, the semi-annual projected DSCR profile shows significant differences between the spring and the autumn payment date. Projected metrics indicate a high risk of coverage falling below 1.0x for class A at the autumn payment dates, which would result in the gradual drawdown of the class A DSRA. This would ultimately lead to payment default in 2021 as the class A DSRA becomes exhausted. Class B debt service has been only partially met in the past years and this is expected to continue going forwards.

Fitch's rating case scenario assumes that production will be in line with the minimum of historical production over the past seven years (481,509Mwh p.a.). 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 informed by Fitch's base case.

The average annual DSCR are 1.04x/ 0.72x for senior and total debt respectively, under the Fitch base case. They are 0.78x/ 0.55x under the Fitch rating case.