hard · Corporate Credit Analysis cca-core
Solaris Energy is an investment-grade utility with an EBITDA of $500M and a total debt of $2,000M (4.0x leverage). Peak-to-Trough Ltd is a cyclical steel manufacturer with the same EBITDA and leverage.
Why might Solaris Energy be rated BBB+ while Peak-to-Trough is rated BB-?
- The steel manufacturer's higher ROIC does not offset the risk of cyclical earnings
- The steel industry has structurally lower loss-given-default than regulated utilities do
- Utilities are always classified as investment grade by rating agencies no matter their leverage levels
- Solaris Energy has lower business risk due to predictable demand and regulated cash flows
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