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Investing.com -- Orsted (CSE:ORSTED) A/S has had its credit rating outlook revised to negative from stable at S&P Global, due to substantial impairments of Danish krone (DKK) 12.1 billion expected in the fourth quarter of 2024. These impairments, related to its U.S. offshore assets, increase the total impairments for 2024 to about DKK19 billion before reversals. The impairments are connected to U.S. interest rate increases, seabed lease valuations, and the execution of the offshore project Sunrise Wind, which negatively affect Orsted's U.S. offshore economics and overall business and financial profiles.
Despite these impairments, Orsted maintains some financial flexibility, particularly through potential reductions in capital expenditure (capex) and an accelerated pace of asset rotation to support the company's rating. S&P Global Ratings has affirmed Orsted's 'BBB' and 'A-2' long- and short-term issuer credit ratings, warning of a possible downgrade to 'BBB-' if Orsted continues to report sizable write-downs or if the group cannot maintain sustainable credit ratios, such as funds from operations (FFO) to debt above 25%, adjusted for minority payments.
The negative outlook is based on the continued loss of value related to U.S. offshore projects. The company announced additional impairments of DKK12 billion, a significant increase from the DKK6.8 billion announced before the third-quarter report in November 2024. This marks the second consecutive year of major impairments related to U.S. offshore assets. The latest write-downs, due notably to higher interest rates, revaluation of the company's seabed leases, and delays and cost-overruns for Sunrise Wind, signal that Orsted's management continues to face challenges in predicting project economics due to swiftly shifting economic conditions and potential regulatory changes.
The execution of farm-downs, or the sale of a portion of a company's interest in a project to reduce exposure to risk, is crucial to maintaining credit metrics in line with the current rating. In a report from Dec. 19, 2024, it was assumed that investments would average DKK45 billion-DKK50 billion a year over 2025-2026. However, following the increased write-downs and costs for Sunrise Wind, it is likely that Orsted will introduce measures to support the rating. These measures could lead to significant changes in capex and farm-downs assumptions in the near term, potentially reducing asset-concentration risks.
Orsted's management is determined to reinforce the company's credit strength, with expectations that the debt level will moderate over 2025-2026 as it completes asset sales that support the credit profile. The company's performance will be monitored closely, including the farm-downs of the large Hornsea 3 and potentially also Hornsea 4 U.K. offshore fields, which require total capex exceeding €15 billion.
The negative outlook also reflects the potential for a downgrade if Orsted fails to sustainably restore S&P Global Ratings-adjusted FFO to debt to at least 25% by 2025. The company's long-term global scale rating will depend on the execution of its remedial plan and the assessment of its business strategy. A downgrade could occur if Orsted continues to report significant impairments, fails to execute on its farm-downs, or if capex materially exceeds the forecast of DKK45 billion-DKK50 billion in 2025.
The outlook could return to stable if Orsted restores its track record of project execution and stronger credit measures.
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