Moody's Lowers Outlook Canadian Solar (CSIQ) to Negative; Ratings Affirmed
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Moody's Investors Service has changed to negative from stable the outlook for Canadian Solar Inc.'s (Nasdaq: CSIQ)(CSI) Ba2 corporate family rating.
At the same time, Moody's has affirmed CSI's Ba2 corporate family rating.
"The negative outlook reflects CSI's increased financial leverage and tightened liquidity resulting from the slower than expected monetization of its solar power project assets," says Gerwin Ho, a Moody's Vice President and Senior Analyst.
CSI's financial leverage, as measured by adjusted debt/EBITDA, rose to around 6.9x in the 12 months ended 30 June 2016 from 5.4x in 2015, driven by (1) a higher level of debt to fund solar power projects that are completed and under construction; (2) lower earnings from sales of solar power projects since it shifted its business strategy from build-to-sell to build-to-hold; and (3) limited stable income from solar power projects that are still under construction.
CSI had previously planned to form a yieldco consisting of solar power assets in developed countries that it aims to list publically. However, due to unfavorable yieldco market conditions, the company announced its decision not to launch a yieldco on 18 August.
Given this development and a further increase in debt, Moody's expects that CSI's financial leverage will rise to above 9.0x in 2016.
While its financial leverage should improve to 6.3x-6.5x in 2017, absent sales of solar power projects and once the completed solar power projects start generating recurring earnings, this level of leverage is weak for its Ba2 rating level.
CSI has large-scale, quality solar power projects that will be completed by end-2016, and the sales of these projects could materially reduce its financial leverage. However, the timing and scale of monetizing these assets are uncertain.
An inability to monetize a significant portion of its solar power projects over the next 6-12 months would heighten pressure on the rating.
"The negative outlook also reflects our expectation of weaker solar module market demand in the next 12-18 months," adds Ho.
While the extension of investment tax credit subsidy in the U.S. at the 30% level to end-2019 from end-2016 will continue to support demand, it will weaken demand for solar modules in the next 12-18 months as customers delay their purchases.
Moody's expects CSI's solar module revenue growth to be pressured in the next 12-18 months, as lower solar module average selling prices will offset growth in solar module shipments.
CSI's liquidity is weak. Its cash and restricted cash of $992 million was insufficient to cover its short-term debt of $1.4 billion as of end-June 2016 and sizeable capital expenditures to fund its solar power projects. However, this weakness is mitigated by an expected active resale market for its solar power projects, its good access to project-based secured financing and sound business profile.
CSI's Ba2 rating reflects: (1) its leading market position in the global solar module manufacturing business; and (2) its diversification into downstream solar power project businesses that enhances its business stability.
On the other hand, the rating is constrained by the inherent cyclicality and volatility of the solar industry, as well as by the company's elevated financial leverage due to the slower than expected monetization of its solar power project assets.
A ratings upgrade is unlikely, given the negative outlook. However, the ratings outlook could return to stable if CSI (1) improves its credit profile by reducing leverage to below 5.5x; (2) improves its liquidity profile; and (3) maintains its diversification into downstream solar power project businesses that enhance its business stability.
The ratings could be downgraded if CSI's position in the global solar module manufacturing industry weakens significantly, or if management undertakes a more aggressive financial policy than expected. Specifically, the rating could be downgraded if adjusted debt/EBITDA exceeds 5.5x-6.0x on a sustained basis. The rating could also come under pressure if the company's liquidity profile weakens further considerably, if it fails to sell solar power projects in the coming 6 to 12 months, or if the resale market for solar power projects weakens because of material negative changes in investor appetite.
The principal methodology used in this rating was Global Manufacturing Companies published in July 2014. Please see the Ratings Methodologies page on www.moodys.com for a copy of this methodology.
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