OREANDA-NEWS. Fitch Ratings has assigned WindMW GmbH's (WindMW, the project company) EUR539m senior secured long-dated notes due June 2027 (Long Notes) an expected rating of 'BBB-(EXP)' and EUR425m senior secured short-dated Short Notes due in December 2021 an expected rating of 'BBB(EXP)'. The Outlooks are Stable.

Final ratings are contingent on the receipt of final documents conforming to information already reviewed.

KEY RATING DRIVERS
The ratings are supported by a favourable regulatory environment under the German Renewable Energy Act with regulated pricing until 2027, sound management strategy, and sufficient financial cushion with average debt service coverage ratio (DSCR) of 1.40x under Fitch's rating case. The Short Notes benefit from full amortisation in six years with stronger coverage, supporting the one-notch difference between the ratings. The Long Notes begin amortising in year seven with lower coverage and refinancing risk under merchant conditions. The Long Notes will be issued in both USD-denominated and EUR-denominated tranches.

German Regulated Pricing
Revenue Risk - Price: Short Notes - Stronger/ Long Notes - Midrange
Until 2027, the project will receive a regulated feed-in-tariff of EUR 150/MWh plus an additional EUR4/MWh under the direct marketing agreement (direct marketing premium). After note maturity, from 2028 to 2034 the project can elect to receive either EUR39/MWh (including EUR4/MWh direct marketing premium) or the prevailing market price. The rates are regulated under the German Renewable Energy Act and any modifications are subject to legislative actions. The project will be fully exposed to market electricity prices from 2035 onwards.

The Short Notes repayment benefits from receiving the full regulated rate until full amortisation in 2021, justifying the Stronger assessment for Revenue Risk - Price. The Long Notes are exposed to refinancing risk upon maturity in 2027 under merchant conditions; therefore we assess them as Midrange.

Adequate Resource Assessment
Revenue Risk - Volume: Midrange
Wind resource forecasts and P50/P90 production estimates were prepared by two experienced advisers with strong consistency between the results. The site benefits from 5.5 years of measurements from two masts located 76km and 92km from the project. One adviser's forecast also included data from an existing project 1km north and five months of actual operating data. Fitch considered the 8.6% difference between P50 and 1Yr P90 as low relative to its experience with onshore wind farms. However, we take comfort from the consistency in the estimation by two reputable experts and the inclusion of actual operating data in the forecast, which reduces estimation needs and helps explain the relatively small differential between P50 and 1yP90.

The eight months of operating data since the project was fully commissioned in February 2015 resulted in performance 13% below P50 forecast unadjusted for teething issues. If adjusted, performance would be in line with P50 forecast, which we consider positive, although reflective of a short period.

Integrated Asset Management Strategy
Operating Risk: Midrange
The project benefits from proven technology (Siemens 3.6-120 turbines), maintains an experienced management team and incorporates a collaborative O&M plan with Siemens AG (A/Stable). During the five-year O&M term, Siemens provides a 95% turbine availability guarantee and project team will cross train with Siemens to develop best practices. Subsequently, the owner will self-perform operations and Fitch regarded this period as having higher exposure to operating risks and potentially heightened cost volatility (reflected in the financial analysis by stresses to O&M costs). These risks are mitigated by the company's proactive O&M strategy and the project's favourable location close (23km) to the O&M base on the island of Helgoland, which facilitates logistics compared with peer projects. O&M cost assumptions on an MW basis compare favourably with some relevant peers and are considered appropriate by the technical adviser.

Fitch considers the redundancy built in the project's design as a key strength mitigating various single points of failure that typically affect offshore wind projects. In addition, the export cables are excluded from the perimeter of the project, which reduces operating risk. Regulatory provisions require the transmission system operator TenneT to execute export cable repair works at its own cost and to pay compensation to the project at 90% of lost revenue in case of 10 consecutive days or 18 non-consecutive days per year of offshore grid downtime.

Manageable Refinancing Risk
Debt Structure: Short Notes - Stronger/Long Notes - Weaker
The project benefits from a six-month debt service reserve, a major maintenance reserve up to the maximum amount of the planned mid-life capex works (EUR 42m), along with a EUR25m working capital line of credit supporting the O&M reserves. A 12-month backward looking and forward looking DSCR covenant of 1.25x is maintained for distributions. Interest rates will be fixed for the notes and a currency swap will be put in place to hedge USD/EUR rate with the issuance of the USD-denominated Long Notes, protecting the project from exchange rate movements up to and including the maturity of the Notes.

The debt structure risk factor for the Short Notes is assessed as Stronger reflecting their full amortisation within the first six years. The Long Notes are initially interest only and begin amortising in year 7 with a balloon payment at maturity in 2027 of approximately EUR102m. Fitch's analysis suggests that refinancing risk under merchant conditions is manageable, depending on the then applicable market and operating conditions, and does not prevent the Long Notes from achieving an investment grade rating. However, this is a differentiating factor in the risk assessments for the Long and Short Notes.

Debt Service - Investment Grade Financial Profile
Fitch's base case based on P50 production estimate forecasts an average DSCR of 1.61x with a minimum 1.49x. Under Fitch's rating case, which relies on 1yP90 production estimate, 95% availability for the first five years, declining to 93% for the remaining term, and a 15% cost stress for the entire period, the DSCR averages 1.41x with a minimum of 1.37x across the notes.

The Long notes are forecast with an average DSCR of 1.39x with the same minimum up to 2027 under Fitch's rating case. The Short Notes are forecast with an average DSCR of 1.42x and minimum of 1.37x. Slightly stronger coverage and shorter amortisation with no refinancing risk support the higher rating of 'BBB'.

RATING SENSITIVITIES
Negative:
Persistently lower than estimated energy production and lower DSCRs.
Decreased project availability or increase in operating & maintenance costs with DSCRs falling below the rating case.

Positive: An upgrade is unlikely at this time.

SUMMARY OF CREDIT
The project is a 288 MW offshore wind farm (MeerWind) located in the German North Sea to the south-west of the Danish-German border. It is 80% owned by The Blackstone Group LP and 20% by Windland Energieerzeugungs GmbH. The bond proceeds will be used to pay off the existing Bank construction facilities, pay swap termination fees and other transaction costs.

The project comprises 80 3.6-120 Siemens wind turbine generators. Construction was completed in line with plan and design, apart from a delay, caused by TenneT, in the connection to the onshore grid, and the project has been operational since February 2015. The project company is currently involved in disputes with two construction counterparties over completion payments and liquidated damages. We understand that negotiations are underway that may resolve the situation prior to financial close, but did not regard this as a rating constraint as we assume that if required, a rational and capable sponsor will incur the extra cost to support the project amid longer-term prospects of strong project economics.

SECURITY
First-ranking priority over substantially all of the assets of the issuer and subsidiaries including rights under the project agreements, project accounts and pledge of equity interest.