HANNON ARMSTRONG SUSTAINABLE INFRASTRUCTURE CAPITAL, INC.
Fitch Ratings has upgraded the Long-Term Issuer Default Ratings (IDRs) of
The Outlook is Stable. Concurrently, Fitch has assigned HASI's new secured term loan a rating of 'BBB' and new unsecured convertible debt and unsecured term loan facility ratings of 'BBB-'.
Key Rating Drivers
The upgrade reflects HASI's enhanced business profile and funding flexibility as well as its strong asset quality, solid operating performance and the maintenance of leverage within its target range. The firm has a proven record in the niche renewable-energy financing sector, which a large and profitable securitization platform and experienced management. It has converted to a C-corporation from a REIT, as the 90% income distribution requirement had historically been considered a rating constraint.
The Stable Outlook reflects Fitch's expectation that HASI will continue to expand profitably, while managing leverage to within its targeted range, although it is at the high-end. Fitch also expects asset quality to remain strong and for HASI to maintain a diverse funding mix, with more than 60% comprising unsecured debt with long-dated maturities.
Rating constraints include HASI's modest scale, niche focus, increased competition within the renewable financing market and the need for continued capital market access to fund investment commitments and portfolio growth, although this has been somewhat mitigated by the recently formed co-investment vehicle with
Fitch expects HASI to continue to expand and diversify, supported by structural trends in the renewable energy sector and its strong relationships with sponsors. HASI's investment portfolio increased by 36% yoy to
The company saw significant growth in its fuel, transport and nature assets segment, including renewable natural gas, which represented 14% of the portfolio at 1Q24, up from 5% a year ago. Behind-the-meter assets, such as residential and commercial solar, comprised 48% of the portfolio, while grid-connected assets, such as utility-scale solar, comprised 38%.
HASI announced on
Fitch expects impaired loans to remain low in the near term, given the lack of at-risk loans. HASI's credit quality metrics remained strong in 1Q24, despite its expansion and a challenging economic backdrop, with sustained inflationary cost pressure and capital market volatility. The company did not categorize any of its loans as impaired at end-1Q24, though it does consider 0.6% to be likely impaired. This is well below the four-year average of 0.9%.
Fitch believes profitability metrics will remain stable, although higher funding costs could slow expansion, reduce the profit margin or raise refinancing risk in the near term. Profitability metrics have been strong, with a pre-tax return on average assets, adjusted for equity method investment income, of 3.8% for the trailing 12 months ended 1Q24. This was above the four-year average of 3.3%. HASI has benefited from the returns generated by higher-yielding investments on its balance sheet as well as fee income from securitization activity.
Fitch believes HASI's long-term leverage target range of 1.5x-2.0x is appropriate for its portfolio risk and ratings and expects leverage to be managed within the range over the long term. Leverage, as measured by total debt/tangible equity, was 2.0x at 1Q24, down modestly from slightly above its target range at 2.1x a year ago. HASI has a stronger ability to manage its leverage post C-corporation conversion, as it will be able to retain a larger portion of its profit. The company is targeting a payout ratio of 60%-70%, which Fitch believes is reasonable.
HASI continues to enhance its unsecured funding profile, with unsecured debt making up 93% of total debt at end-1Q24, from 85% a year ago and 47% at end-2019. Fitch believes this provides meaningful funding flexibility, particularly in times of stress.
HASI had
HASI raised
RATING SENSITIVITIES
Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade
An increase in non-accruals or impairments of equity investments and a sustained rise in leverage above the firm's target range could yield negative rating action. Beyond that, negative rating action could be driven by a large shift in HASI's risk profile, deterioration in operating performance, including a decline in the securitization business, or weaker funding flexibility, including a decline in the proportion of unsecured funding to below 60%.
Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade
Fitch does not expect positive rating momentum over the near-term given the current upgrade. Over the longer term, an upgrade could stem from the maintenance of the firm's market position in a more competitive environment, enhanced scale, profitable growth, continued strong portfolio credit trends, adequate liquidity with extended funding duration, leverage remaining under 1.5x and a steady portfolio risk profile.
DEBT AND OTHER INSTRUMENT RATINGS: KEY RATING DRIVERS
The secured term loan rating is one-notch above the Long-Term IDR. This reflects the first-priority security interest in HASI's assets and Fitch's expectation for above-average recovery prospects under a stressed scenario.
The equalization of the unsecured debt rating with the Long-Term IDR reflects the funding mix and available unencumbered asset pool, which suggest average recovery prospects for debtholders under a stressed scenario.
DEBT AND OTHER INSTRUMENT RATINGS: RATING SENSITIVITIES
The secured and unsecured debt ratings are linked to the Long-Term IDR and are likely to move in tandem. However, a drop in the amount of unsecured debt in the capital structure in favor of secured borrowings or a fall in unencumbered assets could result in the unsecured debt rating being notched down from the Long-Term IDR.
SUBSIDIARY AND AFFILIATE RATINGS: RATING SENSITIVITIES
The ratings of
ADJUSTMENTS
The business profile score has been assigned above the implied score due to the following adjustment reasons: business model (positive), historical and future developments (positive).
The asset quality score has been assigned below the implied score due to the following adjustment reasons: growth (negative), concentration (negative).
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
HASI has an ESG Relevance Score of '4' for Exposure to Social Impacts, as the shift in consumer awareness and preferences toward renewable energy and ESG aspects benefits the company's business model and its earnings and profitability. This has a positive impact on the credit profile and is relevant to the ratings in conjunction with other factors.
HASI has an ESG Relevance Score of '4' for Exposure to Environmental Impacts, as the company is exposed to extreme weather events on some of its assets and operations and any hedges or other offsets are usually imperfect in nature. This has a negative impact on the credit profile and is relevant to the ratings in conjunction with other factors.
The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/topics/esg/products#esg-relevance-scores
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