Brookfield Renewable Partners has announced a deal to acquire securities that are convertible into equity in TransAlta Corp.’s hydro portfolio in Alberta.

The Brookfield Asset Management-sponsored yield company will invest $750 million in the 1,150 MW, 17-project portfolio through the purchase of the exchangeable securities.

Most of the hydro projects have power purchase agreements expiring in 2020, while the remainder are merchant. The oldest of the plants dates from 1911, while the most recent was brought online in 2000.

The yieldco and its institutional partners have also agreed to increase their stake in TransAlta to 9% by buying shares in the open market over the next three years.

CIBC advised TransAlta on the deal while Davies Ward Phillips & Vineberg provided legal counsel. Torys was Brookfield’s legal adviser.

The $750 million investment in the hydro portfolio is broken up into two tranches, each of which bears a coupon of 7% and will be convertible into equity after Dec. 31, 2024.

The first $350 million chunk, expected to close in May, takes the legal form of exchangeable debentures, while the remaining $400 million tranche will close in October 2020 in the form of redeemable preferred shares.

TransAlta will put $350 million of the proceeds toward its coal-to-gas transition strategy, $250 million toward share buy-backs over the next three years and the remainder toward project development and general corporate purposes.


“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,” says a Canada-based investment banker. “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.

Ratings agencies have taken a less sanguine view, however, with Fitch Ratings revising its outlook on TransAlta from stable to negative and S&P Global Ratings placing the company on negative CreditWatch on March 26. TransAlta has the lowest investment grade rating, BBB-, from both agencies.

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.


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