Two ratings agencies have chimed in on TransAlta Corp.’s decision to divest its Alberta hydro assets to Brookfield Renewable Partners.
Fitch Ratings revised its outlook on TransAlta from stable to negative and S&P Global Ratings placed the company on negative CreditWatch on March 26, a day after the C$750 million agreement was announced (PFR, 3/25).
TransAlta has the lowest investment grade rating, BBB-, from both agencies.
The company is planning to issue 20-year subordinated convertible debentures totaling C$350 million to Brookfield over the next few weeks and perpetual convertible preferred shares totaling C$400 million in October 2020.
S&P says there is a more than 50% chance that a downgrade will follow unless the company's funds from operations-to-debt metric hits 22% or it reduces its debt to less than 3.5 times Ebitda by 2020.
Fitch analysts, meanwhile, were concerned about changes in the Alberta electricity market construct as the province transitions to a capacity market by 2022, which would add uncertainty to TransAlta's earnings profile as its merchant exposure grows.
Unless recontracted, the bulk of the 1.15 GW hydro portfolio Brookfield is acquiring would be merchant from 2020 onward.
“The crux of this transaction is that the Brookfield guys are bullish on Alberta merchant markets—and they’re usually the smartest guys in the room,” a Canada-based investment banker tells PFR. “They know hydro very well and with their global reach and operational expertise, they have leverage with suppliers."
The investment banker also noted a strong endorsement of TransAlta in Brookfield's commitment to increase its stake in the public company, which could influence other investors, easing TransAlta's access to capital markets.