I have written about Atlantic Power Corp (NYSE:AT) (TSE:ATP) before, warning that the company could be a value trap, as despite its discount to book and turnaround plan, the company is still facing many headwinds. Unfortunately, over the past few weeks evidence has emerged suggesting that AT is in fact living on borrowed time.

Atlantic Power

Moody’s downgrades Atlantic Power

This is yet another chapter in Atlantic Power Corp (NYSE:AT) (TSE:ATP)’s decline. Moody’s Corporation (NYSE:MCO) has downgraded the company after Atlantic Power Limited Partnership (“APLP”), a wholly-owned indirect subsidiary of Atlantic Power, launched the syndication of new senior secured credit facilities, comprising up to $600 million in aggregate principal amount of senior secured term loan facilities and up to $200 million in aggregate principal amount of senior secured revolving credit facilities. These two facilities will allow AT to replace and refinance a number of existing credit facilities, which is long-term positive, allowing AT to meet maturing debt obligations over the next few years. Previously, these maturities were going to be an issue as it looked as if the company would not be able to meet obligations but with this facility AT has the ability to meet near-term repayment obligations. For this reason Moody’s has changed the company’s outlook from ‘negative’ to ‘stable’. According to Moody’s press release on the decision:

“The term loan will address near term maturities at the Atlantic Power, APLP and the Curtis Palmer project levels…Alleviating the maturities and establishing the new $200 million revolving credit facility at APLP, which will replace the restrictive $150 million AT revolver, is the rationale for changing the outlook at the company to stable from negative…The change to a stable outlook reflects an improved liquidity position from a larger, less restrictive revolving credit facility and elimination of near term maturities.”

Why the downgrade?

So in the near-term this move has been interpreted as positive. However, Atlantic Power only plans to repay $415 million of senior notes with the $600 million term note facility. So, overall the company is increasing its debt load by $175 million excluding the revolving facility. This is the rationale behind the Moody’s downgrade:

“Driven by the increased debt load stemming from the new $600 million term loan at APLP.”

  • “Downgraded the ratings of Atlantic Power Corp (NYSE:AT) (TSE:ATP), including the Corporate Family Rating (CFR) to B2 from B1, Probability of Default Rating (PDR) to B2-PD from B1-PD and the senior unsecured notes to B3 from B2.”
  • “Assigned a Ba3 rating to the new senior secured term loan at AT’s subsidiary Atlantic Power Limited Partnership (APLP). The Speculative Grade Liquidity rating was revised to SGL-2 from SGL-3.”

Now, Atlantic Power has been grappling with its high level of debt for some time now and although this new facility will allow the company to meet maturities, in reality, AT is increasing its debt, something the company can ill afford to do. With this being the case, Atlantic Power Corp (NYSE:AT) (TSE:ATP)’s future success once again depends on the company’s ability to renegotiate favorable long-term power purchase agreements, or PPA’s for the company’s facilities over the next few years, which will give clarity on cash flows, reassuring creditors. Any sustained deterioration in cash flows is likely to be credit negative and with rising debt, AT is now in an even more precarious position with even less room for maneuver.

Atlantic Power might fail to meet fixed charge coverage ratio

Unfortunately, Atlantic Power is also about to breach the fixed charge coverage ratio included in the restricted payments covenant on a portion of debt, which must be at least 1.75 to 1.00, measured on a rolling four quarter basis. Atlantic Power Corp (NYSE:AT) (TSE:ATP)’s management expects that the company will fail to meet the fixed charge coverage ratio as early as late February, and according to AT’s press release on the matter:

“…As a consequence, further dividend payments, which are paid at the discretion of the Company’s board of directors, in the aggregate cannot exceed the covenant’s “basket” provision of the greater of $50 million and 2% of consolidated net assets (approximately $68 million at September 30, 2013) until such time that the fixed charge coverage ratio were to be satisfied…”

So it looks as if a dividend cut is coming. Overall, it would appear that AT is being squeezed further and while short-term liquidity has been patched with the new revolver, long-term the company is against the ropes.