CANADIAN SOLAR INC

Rating Action and Rationale

• EthiFinance Ratings downgrades Canadian Solar Inc´s long-term rating from BBB to BBB-, changing the outlook from Negative to Stable.
• The downgrade is mainly driven by a gradual weakening in the company’s financial profile over recent periods. It is critical to characterize the recent financial deterioration as cyclical rather than structural, primarily driven by a temporary global oversupply of modules. With price normalization and capacity rationalization in China already underway, and the company´s strategic transition to an IPP model supported by proven capital recycling mechanisms, including asset rotation, non-recourse structures, and tax equity, the financial snapshot from 2023–2025 is not representative of the company´s long-term risk profile. The gradual weakening has been materialized in higher leverage and tighter coverage ratios, with net debt-to-EBITDA and EBITDA-to-interest moving from historically solid levels (~2.4x and >8x, respectively) to current metrics that are expected to average around ~4x and ~5x going forward. This deterioration reflects both sector-specific headwinds in the electrical equipment / solar manufacturing segment (namely the steep decline in module pricing, oversupply across the value chain and higher cost pressures) which have compressed margins, and the company’s strategic transition within Recurrent Energy from a predominantly “develop-to-sell” approach toward a long-term ownership model (a hybrid IPP strategy).
• However, as announced in its Q3 2025 earnings call, the company now plans to accelerate asset rotation to strengthen cash flow and deleverage its balance sheet. While the strategic transition is viewed positively from a qualitative standpoint (given the increased revenue stability and lower earnings volatility associated with contracted cash flows under PPAs) it requires significant upfront capital expenditure, largely financed through debt or non-recourse structures that nevertheless carry meaningful financial commitments. As a result, the company’s consolidated leverage is expected to remain elevated, limiting deleveraging capacity in the near term. However, the company’s asset rotation plan during 2026 progressively enhances cash flow and support balance sheet strengthening as its effect begin to materialize.
• In addition, the Stable Outlook reflects our expectation that, despite leverage remaining elevated in the coming periods, the company will be able to keep its credit metrics within the ranges outlined above. We do not anticipate a further deterioration in the short to medium term, as the current business and financial trajectory is deemed broadly predictable and consistent with the rating category.
• The investment grade rating is underpinned by i) a sector with solid fundamentals (medium levels of profitability, controlled volatility, high barriers to entry and favorable growth prospects) which is further supported by the positive impact of ESG on its assessment; ii) the company’s strong competitive positioning based on its vertical integration, its appropriate size and an outstanding diversification, both by product and by geography, which significantly mitigates regulatory and market risk, and iii) a governance framework assessed positively, reflecting a high-quality management team and the transparency and discipline associated with a publicly listed ownership structure.
• On the other hand, the rating is constrained by i) a strategic shift by the Recurrent Energy segment that requires a significant amount of CapEx, mostly financed with debt, and therefore has led to a leverage increase and a coverage ratio deterioration; ii) the significant weighting of minority interests in the CSI Solar division (36%), which may dilute the cash transfer to the holding in the event of a dividend distribution to support the Recurrent Energy division, although these dividend policies are structured to maintain flexibility and support the group.
• According to our methodology, the renewable energy sector (capital goods – electrical equipment) is well aligned with ESG factors (heatmap score of between 1 and 2). This consideration results in a one-category upgrade (three notches) in the industry risk assessment. The group’s ESG policies are considered neutral (ESG score between 1.5 and 3.5), resulting in a rating that is not affected by these factors.

Company Description

Canadian Solar is a global solar technology and renewable energy company, founded in 2001 in Ontario, Canada. The company is one of the world’s largest operators in the sector, with a global presence across more than 160 countries and employing around 18,000 people.

The company is involved in i) the manufacturing of photovoltaic panels; ii) the manufacturing of battery energy storage systems; iii) the development and operations of solar power and battery storage plants.

Canadian Solar has been listed on the Nasdaq since 2006. CSI Solar, the company´s majority-owned subsidiary, which manufactures products in China, Southeast Asia, and the U.S, has been publicly listed on the Shanghai Stock Exchange (STAR Market) since 2023.

For 2024, the sales of Canadian Solar were $5.9b with EBITDA of $743.7m (EBITDA margin of 12.4%). The Adjusted NFD/ Adjusted EBITDA ratio stood at 4.9x at end 2024. Canadian Solar’s current market capitalization is $1.68b (at 26/11/2025).

The company functions as a holding company with its business operations divided into two main segments: CSI Solar and Recurrent Energy.

Source: Canadian Solar 2025Q3 Earnings Call Presentation. Formatted by EthiFinance.

The CSI Solar division is focused on the design, development and manufacturing of solar and battery energy storage products (94.6% of total sales in 2024; Canadian Solar holds 64%).

• Manufacturing: CSI Solar operates manufacturing facilities in China, Southeast Asia, and the United States. It employs a flexible, vertically integrated model, producing solar ingots, wafers, cells, and modules.
• Solar Products: It offers a comprehensive line of crystalline silicon solar modules, including advanced N-type TOPCon modules, for residential, commercial, and utility-scale applications.
• Battery Energy Storage Solutions: This segment includes the e-STORAGE brand, which provides integrated utility-scale, turnkey battery energy storage solutions.
• System Solutions: CSI Solar also provides other solutions, such as inverters, solar system kits and EPC services.

Source: Canadian Solar 2024 Annual Report. Formatted by EthiFinance.

At the end of 2024, e-STORAGE's had 4.9 GWh of battery projects under long-term service agreements and contracted backlog, of approximately $3.2 billion.

The Recurrent Energy division (formerly Global Energy) is the company´s global project development and power services arm. This segment focuses on developing, building, selling and operating solar power and battery energy storage projects globally (5.4% of total sales in 2024; Canadian Solar holds 80%). It is involved in the following phases:

• Project Development: Recurrent Energy manages a large and geographically diversified pipeline of solar and battery storage projects at various stages of development.
• Asset Sales: The company monetizes projects in various stages of development to third-party buyers, such as utilities, independent power producers, and energy investors.
• IPP Operations (Power Sales): As part of a strategic transition, Recurrent Energy is shifting from a purely "develop-to-sell" model to a "hybrid model". It is retaining a greater ownership stake in selected projects, particularly in markets like the U.S. and Europe, to operate them as an Independent Power Producer (IPP). This strategy is designed to increase long-term, recurring revenues from the sale of electricity.
• Power Services: The segment also provides long-term power services, including O&M (Operation & Maintenance) and asset management for operational projects, both for its own portfolio and for third-party owners.

Source: Canadian Solar 2024 Annual Report. Formatted by EthiFinance.

As of year-end 2024, Recurrent Energy's pipeline demonstrated a significant strategic focus on energy storage. The Recurrent Energy pipeline includes approximately 57 GWh of "Early-stage development" storage projects and 16 GWp of solar PV pipeline, as base of company´s future growth potential.

Source: Canadian Solar 2024 Annual Report. Formatted by EthiFinance.

Fundamentals

Business Risk Profile

Industry Risk Assessment

• The renewable energy sector offers high growth prospects. The manufacturing of photovoltaic (PV) panels is subject to medium volatility, offers medium margins and rather high barriers to entry.

Canadian Solar's main activity is manufacturing, placing it within the "capital goods" sector for industry risk assessment. The capital goods sector is characterised by medium volatility, rather high barriers to entry (significant capex required to build up a plant) and a medium level of profitability (EBIT margin ~10%). In particular, the photovoltaic sector has increasingly strong growth prospects with a CAGR between 6.9% and 14% over the next 5 to 6 years. This growth will be underpinned by rising electricity demand and the increasing penetration of solar generation in the energy mix, driven by favourable policies and financial returns. The global PV sector is dominated by Chinese companies, which could be affected by geopolitical turmoil between China and the US.

Complementing its manufacturing base, Canadian Solar has vertically integrated downstream into the development, ownership, and operation of solar power projects, positioning this segment within the 'Utilities' sector. The Utilities sector is characterised by low to medium volatility, high barriers to entry due to complex regulatory approval, grid interconnection rights, high capital intensity and a stable, often recurring level of profitability (EBIT margin ~15-25%). Canadian Solar’s global presence and use of long-term contracted or hedged structures help mitigate regional regulatory risks inherent to this sector.

Unlike the manufacturing sector, the global Utility sector is fragmented and regional rather than dominated by a single country's output. However, players could be affected by regulatory changes, interest rate fluctuations, and grid capacity constraints, leading to curtailments. Consequently, the market is multi-local and regulation-dependent. In this context, Canadian Solar’s geographic and business-model diversification provides an additional layer of resilience relative to more regionally concentrated peers.

The long-term growth prospects for the solar and battery storage sector are exceptionally strong, driven by a global consensus on decarbonization and energy security. The industry is still in its early stages; in 2024, solar power accounted for only 7% of global electricity generation. To meet the 1.5°C Paris Agreement goal, global installed solar PV capacity is projected to grow from approximately 2.8 TW in 2025 to 18 TW by 2050, with storage expected to grow even faster due to increasing flexibility needs across major grids.