S&P Downgrades NRG Yield (NYLD) to 'BB'; Outlook is Stable

August 15, 2016 12:25 PM EDT

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S&P Global Ratings said that it lowered its corporate credit rating on NRG Yield Inc. (NYSE: NYLD) to 'BB' from 'BB+'. The outlook is stable.

At the same time, we lowered the rating on the $500 million senior unsecured notes due 2024 at subsidiary NRG Yield Operating LLC, to 'BB' from 'BB+'. The recovery rating on these notes remains '3', indicating our expectation for meaningful recovery (50% to 70%, at the higher end of the range) in the event of default. We have also assigned our 'BB' ratings, and '3' (50%-70%; higher end of the range) recovery rating to NRG Yield Operating LLC's proposed $350 million unsecured notes due 2026. We have not rated $345 million and $288 million of convertible debt due 2019 and 2024, respectively.

"The rating change largely stems from a revision in the wind resource forecast across NYLD's wind assets. Because of that we have revised our FFO to debt and debt to EBITDA estimates to 15.5%-16% and 4.8-5x from 19.5% and 4.2x, respectively, through 2018," said S&P Global Ratings credit analyst Aneesh Prabhu.

The revision was based on the impact of additional historical operating data as well as updates from third party long-term views of wind resource at specific sites within NYLD's portfolio. The slowdown in expected cash flow growth also contributes to our decision, as it lowers projected financial measures in the outer years. Our financial measures are based on our revised project developer rating criteria released March 21, 2016.

The stable outlook on NYLD reflects our expectation of a long weighted average cash flow contracted profile, and modest volatility in cash flows from resource risk. We expect normalized FFO to debt levels and debt to EBITDA of about 14%-18% and 4.75-5x, respectively.

We assess the SACP of NYLD and subsidiary NRG Yield Operating LLC as 'bb'. We allow a separation between the ratings of NYLD and its parent company, NRG Energy Inc., based on existing separation provisions, though we still view the ratings as linked due to control and business relations, especially relating to growth prospects. We could lower our ratings on NYLD if ratings of parent NRG Energy were to decline. We could also lower the rating if NYLD's SACP deteriorated. The company's performance did not meet expectations in 2015 because of lower wind resources in California and an outage at a combined-cycle gas turbine unit. We viewed these as one-time events, and expect FFO levels to recover. Should cash flow continue to lag, however, we would consider a negative outlook if FFO to debt fell below 13%-14% and debt to EBITDA was consistently above 5x.

In the absence of a track record of disciplined growth, we do not foresee a ratings upgrade in the next few years. Absent an upgrade of NRG Energy's group credit profile, we also wouldn't envision upgrading NYLD because of the link between the two companies.

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