Fitch Ratings has affirmed Andromeda Finance S.r.l.'s class A1 notes' underlying rating at 'BBB' and class A2 notes' rating at 'BB+'.

The Outlook is Stable. The class A1 notes' rating benefits from SACE S.p.A.'s (BBB/Stable) unconditional and irrevocable guarantee.

KEY RATING DRIVERS

The affirmation reflects the sound operational performance and the feed-in-premium (FIP) received by the project on top of market sales under the Italian regulatory framework for solar plants (Conto Energia), limiting the project's exposure to merchant risk. The project further benefits from the use of proven technology and a robust operation and maintenance (O&M) services agreement with SunPower, the panel manufacturer and an experienced operator of solar PV plants. The ratings also consider the fairly low uncertainty of generation due to strong historical production levels and high availability consistently above 99%.

The project's financial coverage profile, with an annual average debt service coverage ratio (DSCR) under the Fitch rating case of 1.46x reducing to a minimum 1.23x by 2028 position the rating at 'BB+'.

The class A1 notes' rating benefits from a SACE guarantee and reflects its rating.

Strong Operator and Established Technology: Operation Risk - 'Stronger'

The mono-crystalline panel technology is well-established and operating requirements for PV plants are straightforward. SunPower is the equipment manufacturer and the operator. Renegotiated O&M contracts are comprehensive, fixed-priced and cover the full life of debt. Although Fitch regards SunPower as a sub-investment-grade counterparty, there is a large pool of replacement contractors in the market. Existing operating cost history shows modest variability due to some one-off items and costs have been reducing over time, demonstrating strong cost control.

Strong Production History: Revenue Risk (Volume) - Stronger

The project's operating history for the past 11 years has been consistent with projections, validating the reliability of the forecast. The energy production forecast, which was revised in 2015, is supported by several years of operating data showing only a difference of 6% between P50 and 1YP90 production estimates and confirming low resource volatility. Andromeda has demonstrated very high availability of 99.7% on average since 2011 while also remaining above Fitch's rating case assumption of 98%. The project is also not overall exposed to revenue losses from grid curtailment.

Limited Exposure to Merchant Prices: Revenue Risk (Price) - Midrange

The project has a guaranteed revenue stream through feed-in-premium (FIP) at EUR318/MWh (approximately 80% total revenue in FY21) under the Italian regulatory framework for solar plants (Conto Energia) covering beyond the full debt tenor. In addition, energy production could be sold at the zonal wholesale (Central-South) energy prices (20% of total revenue in FY21) through a private power purchase agreement (PPA).

Senior Debt, Fully Amortising: Debt Structure - Midrange

The transaction is a project-finance structure with some elements of a securitisation. Project documentation is well-structured and debt terms are fairly straightforward with two fixed-rate fully amortising senior tranches ranking pari-passu, no floating interest-rate risk and no refinancing risk. A debt service reserve of six months and a lock-up ratio of 1.15x constrain the overall debt-structure assessment to 'Midrange'.

Financial Profile

Fitch's rating case assumes 1y-P90 production level, increased expenses, higher degradation of panels, and a conservative market price assumption, resulting in a DSCR of 1.46x (average) with a minimum of 1.23x (2028). Metrics improve over the medium term due to the current soaring energy prices but drop towards the maturity of the debt with energy prices expected to normalise in the long term. As per Fitch's Renewable Energy Project Rating Criteria we compare the Fitch rating case metrics with the DSCR threshold calculated on the basis of the proportion of the project's regulated revenue and market sales.

PEER GROUP

Solar Star Funding LLC (BBB-/Positive) is significantly larger than Andromeda at 579MW. Solar Star has a 'Stronger' assessment for price risk due to a long-term power purchase agreement with a strong counterparty. Solar Star has an increasing DSCR profile over the life of the debt and a 'Stronger' assessment for debt structure, with a Fitch rating case DSCR that averages 1.47x, leading to the rating differential with Andromeda.

RATING SENSITIVITIES

Factors that could, individually or collectively, lead to negative rating action/downgrade:

Class A1 underlying rating and class A2 rating:

Rating-case DSCR profile consistently below 1.25x

Class A1 rating:

Downgrade of guarantor SACE

Factors that could, individually or collectively, lead to positive rating action/upgrade:

Class A1 underlying rating and class A2 rating:

Rating-case DSCR profile consistently above 1.28x

Class A1 rating:

Upgrade of guarantor SACE

Best/Worst Case Rating Scenario

International scale credit ratings of Sovereigns, Public Finance and Infrastructure issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of three notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.

TRANSACTION SUMMARY

The transaction is a securitisation of two project loans (facilities A1 and A2) under law 130/99 (the Italian securitisation law). The loan facilities were extended by BNP Paribas and Societe Generale to Andromeda PV S.r.l. (the project company) to build and operate two PV plants of 45.1MW and 6.1 MW in Montalto di Castro, Italy.

The terms of the loans effectively mirror those of the rated notes, with payments under facility A1 and facility A2 servicing the class A1 notes and class A2 notes, respectively. The class A1 notes' rating and Outlook reflect the first-demand, irrevocable and unconditional guarantee provided by SACE. The guarantee provided by SACE to the issuer is in respect of the project company's obligations under facility A1 and not on the class A1 notes directly.

CREDIT UPDATE

Technical performance over the past year has been below P50 levels by 2.1% due to the low irradiation recorded especially in 1Q21 but remained above P90 levels. Historically, Andromeda has demonstrated very high availability of 99.7% on average since 2011. In 1Q22 (the latest available figures) availability averaged 99.92%.

In the current context of soaring electricity prices, Fitch notes the upside available for Andromeda from merchant sales may not be unlimited as electricity prices would be capped and windfall taxes would be imposed to limit the pressure on end consumers.

FINANCIAL ANALYSIS

Fitch's base case applies a P50 production forecast, degradation in line with sponsor assumptions at 0.5% a year, 98% availability, and Fitch's latest Italian CPI assumptions for inflation inputs. The base case also uses the market advisor's updated central price forecast with a 10% stress applied. Fitch does not expect Andromeda to generate tax losses that could be consolidated by the parent company (ERG S.p.A.) due to the soaring energy prices. Consequently, Andromeda would not receive tax-saving compensation.

As a result of soaring energy prices, clawback measures introduced by the regulator fix a reference price that would be received instead of the high tariffs on the wholesale market. Fitch assumes a price cap of EUR57/MWh for Andromeda in FY22 until end June 2023. This is based on the applicable price cap for the Central-south area based on historical average zonal electricity prices in Italy. Windfall taxes of 25% have been considered for the reference period from 1 October 2021 to 30 April 2022. Nonetheless, as we expect energy prices to moderate in the longer term, the lower DSCR towards the end of the forecast continues to weigh on the ratings.

Fitch's rating case applies a 1YP90 production forecast, degradation in line with sponsor assumptions at 0.5% a year until 2020, then an increased degradation of 0.75% a year, a 20% stress on Sunpower's O&M costs and a 5% stress on remaining operational and lifecycle costs. The stress on Sunpower's O&M costs reflects the significant price reduction (approximately 35%) from the 2019 amendment, and that Sunpower is unrated. That means that if the operator is replaced, it could be at a significantly higher cost. The rating case also uses an average of the market advisor's central and low-price forecasts. In the rating case and base case we have considered the regulatory price cap and the windfall taxes.

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

Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This 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. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg

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