Fitch Ratings has assigned a 'BBB' rating to the secured term loan guaranteed by Hannon Armstrong Sustainable Infrastructure Capital, Inc. (HASI: 'BBB-'/Stable).

Concurrently, Fitch has assigned a 'BBB-' rating to the unsecured convertible debt and unsecured term loan facility to HAT Holdings II LLC (HAT II), also co-issued by HAT Holdings I LLC (HAT I), indirect subsidiaries of HASI. These actions are being taken to correct an error made by Fitch when it assigned ratings to debt at the incorrect entities. There is no impact to the other ratings related to HASI.

Fitch has also withdrawn the secured debt rating of 'BBB' from HAT I as the rating was published in error.

Key Rating Drivers

HASI's ratings reflect its 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.

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. However, this has been somewhat mitigated by the recently formed co-investment vehicle with KKR & Co. Inc. (rated A/Stable), CarbonCount Holdings 1 LLC (CCH1).

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 HAT Holdings I LLC and HAT Holdings II LLC are equalized with those of HASI. The subsidiaries are intermediate holding companies and we expect their ratings to move in tandem with those of the parent.

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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