April 5, 2012 / 5:42 PM / 5 years ago

TEXT-S&P cuts Capstone Infrastructure Corp

Overview	
     -- We are lowering our long-term corporate credit rating on Capstone 	
Infrastructure Corp. to 'BB+' from 'BBB-'.	
     -- We are also lowering our global scale preferred stock rating on 	
Capstone to 'B+' from 'BB', and our Canada scale preferred stock rating to 	
'P-4(High)' from 'P-3'.	
     -- In addition, we are placing the ratings on the company on CreditWatch 	
with developing implications.	
     -- The downgrade reflects our view that Capstone's liquidity is 	
'less-than-adequate'; as per our criteria, a company with 'less-than-adequate' 	
liquidity cannot have a corporate credit rating higher than 'BB+'.	
     -- We believe the CreditWatch resolution could result in a return to 	
investment-grade status for Capstone.	
     -- Although we consider it unlikely, if the company is unable to either 	
pay down or extend its C$119 million bank revolver maturing in June, a 	
multinotch downgrade could occur.	
	
Rating Action	
On April 5, 2012, Standard & Poor's Ratings Services lowered its long-term 	
corporate credit rating on Toronto-based Capstone Infrastructure Corp. to 	
'BB+' from 'BBB-'. At the same time, Standard & Poor's lowered its global 	
scale preferred stock rating on the company to 'B+' from 'BB', and its 	
Canada-scale preferred stock rating to 'P-4(High)' from 'P-3'. Standard & 	
Poor's also placed the ratings on CreditWatch with developing implications, 	
meaning we could raise, lower, or affirm the ratings upon our review.	
	
We view Capstone's liquidity as 'less-than-adequate', given a material bank 	
facility maturity within three months.  Given the company's strong ongoing 	
relationships with its banks, we expect that it should be able to address the 	
upcoming maturity. The downgrade reflects Standard & Poor's criteria, which 	
stipulate that a company with 'less-than-adequate' liquidity cannot have a 	
corporate credit rating higher than 'BB+'.	
	
Rationale	
Standard & Poor's views the company's revenues and cash flow from long-term 	
power purchase agreements with provincial government agencies and 	
investment-grade off-takers as stable. In addition, we believe there is a 	
track record of sustained high availability and operating performance of 	
Capstone's generation assets. We believe that offsetting these strengths are 	
modest asset and geographic diversity, recontracting risks for two of its 	
material generating facilities, and our expectation that the company would 	
increase debt in executing its growth strategy. Evidence of this includes the 	
acquisition of Bristol Water Holdings UK Ltd. While we believe that this 	
acquisition will help to stabilize revenue in the long term, its financing has 	
challenged liquidity. 	
	
Based on the maturity date of the CPC Cardinal credit facility in June 2012 	
and the senior credit facility in October 2012, Capstone's liquidity sources 	
did not exceed its uses by 1.2x (as per our liquidity criteria) as of Dec. 31, 	
2011. However, under our criteria, if we believe the company has a credible 	
plan to address the lack of liquidity that causes sources divided by uses to 	
be less than 1.2x within three months, then we can still deem liquidity to be 	
adequate. 	
	
The company has outlined several initiatives to address its liquidity 	
position. These include refinancing some of the hydro projects under MPT Hydro 	
L.P. and using the net proceeds to reduce debt outstanding under the CPC 	
facility; recapitalizing Varmevarden AB (a company, which Capstone purchased 	
in March 2011, that owns and operates a portfolio of 11 district heating 	
businesses in Sweden) and using proceeds to reduce the amount outstanding on 	
the senior credit facility; and other options, including a new corporate 	
credit facility. To date, the company has completed the Varmevarden 	
refinancing and realized proceeds of approximately C$50 million, which it used 	
to pay down a portion of the senior credit facility.	
	
As we outlined in our Feb. 8 analysis, given the importance of these efforts 	
in rectifying Capstone's near-term liquidity needs, failure to finalize these 	
plans (including funding) by March 31, 2012, might result in a negative rating 	
action. While the company has made progress with respect to these various 	
efforts, they were not finalized by March 31, as per our criteria.	
	
CreditWatch	
We believe the CreditWatch resolution, which we expect to come within the next 	
90 days, could result in a return to investment-grade status for Capstone. 	
Although we consider it unlikely, if the company is unable to either pay down 	
or extend its C$119 million bank revolver maturing in June, a multinotch 	
downgrade could occur.	
	
Related Criteria And Research	
     -- Methodology And Assumptions: Liquidity Descriptors For Global 	
Corporate Issuers, Sept. 28, 2011	
     -- Criteria Methodology: Business Risk/Financial Risk Matrix Expanded, 	
May 27, 2009	
     -- Key Credit Factors: Business And Financial Risks In The Investor-Owned 	
Utilities Industry, Nov. 26, 2008	
     -- Hybrid Capital Handbook: September 2008 Edition, Sept. 15, 2008	
     -- Rating Criteria For Project Developers, Sept. 30, 2004	
	
Ratings List	
Ratings Lowered And Placed On CreditWatch Developing	
	
Capstone Infrastructure Corp.	
                               To                      From	
 Corporate credit rating       BB+/Watch Dev/--        BBB-/Stable/--	
 Preferred stock	
  Global scale                 B+/Watch Dev            BB	
  Canada scale                 P-4(High)/Watch Dev     P-3

Our Standards:The Thomson Reuters Trust Principles.
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