Fitch Ratings (Fitch) has assigned a first time 'B+' Long-term Issuer
Default Rating (IDR) to ContourGlobal L.P. (CGLP). The Rating Outlook is
Stable. Simultaneously, Fitch has assigned 'BB+/RR1' rating to
ContourGlobal Power Holdings S.A.'s (CGPH) $30 million super senior
revolver due 2018 and 'BB-/RR3' to CGPH's $400 million senior secured
notes due 2019. CGPH is a financing subsidiary of CGLP and the ratings
of its debt obligations primarily benefit from a guarantee from CGLP.
The individual security ratings at CGLP are notched based on a recovery
model that reflects the IDR and the priority ranking of the debt
obligations in a hypothetical default scenario.
A complete list of rating actions follows at the end of this release.
KEY RATING DRIVERS
Diversified Assets with Long Term Contracts
CGLP owns and/or operates approximately 3.6GW (CGLP's share 2.8GW) of
generation facilities with 314MW (CGLP's share 216MW) under
construction. The generation facilities are diversified geographically
with presence in 20 countries and three continents. Europe, Latin
America, and Africa are expected to account for 53%, 34% and 13% of 2016
EBITDA. The generation capacity (including projects under construction)
is comprised of 31% gas, 31% coal, 22% wind, 11% hydro, 3% fuel oil and
remaining in solar and biomass. Long term contracts and regulated
revenues account for 91% of total revenue between 2014 and 2021. Power
Purchase Agreements (PPAs) have a weighted average life of approximately
12 years. Majority of PPAs are either capacity based which covers fuel
cost and other variable costs or with fixed long term prices with
inflation pass-through. Most PPA offtakers hold an investment grade
CGLP's two largest projects Maritsa (908MW lignite, CGLP's share 663MW)
in Bulgaria and Arrubal (800MW natural gas) in Spain will represent
approximately 27% and 14% of 2015 EBITDA, which is a credit concern.
With acquisitions and new projects coming into service, the combined
EBITDA of these two projects could decline to 36% but remain
substantial. The normalized cash available to CGLP from these two
projects as a percentage of all cash available to CGLP is generally
consistent with the EBITDA proportion. Bulgaria's Natsionalna
Elektricheska Kompania EAD (NEK) is the offtaker for Maritsa. NEK is not
rated by Fitch. NEK's parent Bulgarian Energy Holding EAD (BEH)
currently holds an IDR of BB- and Negative Outlook by Fitch. BEH is 100%
owned by the Bulgarian government through the Ministry of Economy. Gas
Natural, SDG S.A. (IDR'BBB+'/Stable Outlook) is the offtaker for Arrubal
The recent settlement between NEK and Maritsa regarding PPA capacity
price reduction under the direction of Bulgaria's Energy and Water
Regulatory Commission (EWRC) removes a substantial overhang for CGLP;
however, it highlights the political challenges that CGLP faces. Under
the settlement, CGLP will reduce capacity prices by 15% and NEK will pay
CGLP approximately EUR88 million in net proceeds, eliminating the
uncertainty of chronic late payments from NEK.
Limited Financial Flexibility
CGLP relies on external funding sources to execute its growth strategy.
Non-resource senior secured project financing is the primary source of
funding. Project assets are encumbered and are subject to various
security restrictions that could be very complex and prevent upstream
distribution to CGLP. Additionally, CGLP's capability to access public
capital markets is largely untested.
Challenging Operating Environment
Though CGLP's exposure to commodity prices and demand changes are
mitigated by the terms of the PPAs, it is subject to structural changes
and political risk.
Fitch's general view is that European wholesale power prices will remain
at their current low level through 2019. Carbon policies are relatively
less drastic in Bulgaria than in western Europe. Some central European
countries from the European Union, which have substantial power
generation from coal and lignite-fired plants, such as Bulgaria and
Poland, benefit from a gradual phase-out of free carbon dioxide
allowances until 2020. Power plants in these countries do not have to
purchase 100% of CO2 allowances but 40%-60% and going up to 100% by
2020. In the other parts of the European Union (EU), power plants have
to purchase 100% of their CO2 allowances, which dents their profit
margins on power generation. The price of CO2 allowances is slowly going
up (EUR8/tonne) but it is still relatively low compared to 2011
(EUR22/tonne) due to economic slowdown and oversupply. However, the EU
intends to limit supply in order to support CO2 prices.
In Spain, gas-fired power plants, including CGLP's Arrubal plant,
receive capacity payments from the system operator. Although this
capacity payment currently represents only 4% of project's total
revenue, the political pressure to reduce payment could be a long term
concern. These capacity payments were reduced as part of a larger energy
sector reform in 2012-2014 targeting elimination of the tariff deficit
in Spain. CGLP's capacity payment from the system operator was reduced
by approximately 33%. To compensate for the reduction, the capacity
payment contract was extended till 2017 instead of 2015.
To mitigate political risks, CGLP enters into Political Risk Insurance
(PRI) policies for non-investment grade countries except for the
Kramatorsk project in Ukraine. PRI coverage includes expropriation,
political violence, currency inconvertibility, forced divesture, forced
abandonment and breach of contract via non-honoring of arbitral award.
CGLP's credit metrics are at the low end of the range for the rating.
There is limited headroom in the assigned 'B+' rating level if material
negative credit events occur. Fitch evaluates CGLP's credit metrics both
on consolidated basis and on distribution basis. The consolidated method
acknowledges that although project debt is non-recourse, CGLP will
likely provide financial support in time of stress especially for its
large projects. Additionally, many projects such as Maritsa are
contracted with government or quasi-government entities, thus could be
complex to terminate. As several projects which have been acquired or
become fully operational in 2015 - 2016, Fitch projects consolidated FFO
lease adjusted leverage to decline to 6.3x in 2017 from the current 8x.
On a distribution only basis, Fitch projects recourse debt/distribution
to average 4.8x for the next three years. The distribution cash flow is
structurally inferior to cash flow at the operating company level.
Long-term Re-contracting Risks
Re-contracting exposes CGLP to uncontrollable factors such as fuel and
energy prices and demand changes. The PPAs for approximately 45% of the
total capacity will expire before 2025 which include Maritsa's PPA
expiring in 2024 and Arrubal's in 2021. If the weak wholesale power
prices and low capacity utilisation for gas-fired plants were to
continue in Europe, many PPA contracts are likely to be re-contracted
with a shorter term or become uncontracted.
Pending Yieldco Could Add Complexity
In April 2015, CGLP filed with the SEC to establish a ContourGlobal
Yield Limited to be publicly listed in the U.S. Generally, a yieldco
structure is credit negative or at best neutral to the sponsor. Fitch
acknowledges that yieldco structure adds additional funding source and
could improve scale and distribution to the sponsor. However, CGLP will
likely transfer its most valuable assets to yieldco, and potentially
create more layers of structural subordination and cash leakage. A
yieldco structure will also incentivize the pursuit of more aggressive
growth strategy in order to achieve distribution targets. If yieldco
becomes publically listed, CGLP's ratings will be evaluated based on
factors such as the usage of the equity proceeds, the severity of
structural subordination and cash leakage, the planned limited partner
ownership and distribution structure.
The 'BB+/RR1' ratings for CGPH's super senior revolver and 'BB-/RR3' for
its $400 million senior secured notes are based on Fitch's recovery
waterfall and incorporates the limit on total security available to the
secured debtholders under the credit agreement. Fitch values CGLP's
equity interest in its operating subsidiaries at $462 million under a
distressed scenario. The 'RR1' rating for the revolver reflects
outstanding recovery prospects given default with securities
historically recovering 91% - 100% of current principal and related
interest and reflects a three-notch positive differential from CGLP's
'B+' IDR. The 'RR3' rating for the senior secured notes reflects a
one-notch positive differential from the 'B+' IDR and indicates good
recovery of principal and related interest of between 51% -70%.
CCGLP will continue to rely on external financing for its investment
needs. In April 2015, CGPH entered into a three-year super-senior $30
million bank revolving credit agreement. The facility is currently
undrawn. In July 2015, CGPH entered into a $150 million senior secured
bridge loan agreement which if not refinanced would term out to 2019,
primarily to fund its equity commitment in the Vorotan project and
construction in KivuWatt and Cap des Biches. Debt maturity is
manageable. The existing senior secured notes and the senior secured
bridge loan are not due until 2019.
The primary financial covenant requires CGLP to maintain the Debt
Service Coverage Ratio above 2.25x, and the non-guarantor combined
leverage ratio (excluding project financed subsidiaries) equal to or
less than 5.0 to 1.0. Considering the contributions from acquired or to
be completed new projects, Fitch estimates CGLP to have approximately
$300 million in debt capacity at the corporate level in the next two
years. As of Sept. 25, 2015, cash and cash equivalents includes $99
million of unrestricted cash and $227 million cash for debt service or
security at the project level.
--Approximately $140 million equity investment for committed
acquisitions or construction in 2015;
--Continuation of Arrubal's reduced capacity payment from the system
operator until government contract expires in 2017;
--Receives NEK payment of EUR 88 million regarding to overdue
receivables in Q4, 2015;
--Reduce capacity payment from NEK by 15% starting June 2015;
--Maritsa and Arrubal availability factors are at required level of 82%
for Maritsa, and 86%-93% for Arrubal. Fitch notes that actual
availabilities have been higher historically.
Based on the projected credit metrics for the next 3-5 years, and
pending the yieldco transaction, it is unlikely that CGLP's ratings will
be upgraded. Nevertheless, future developments that may, individually or
collectively, lead to a positive rating action include:
--On a consolidated basis, FFO lease adjusted gross leverage below 5.0x
on a sustained basis; On a distribution only basis, recourse
debt/distribution below 3.0x on a sustained basis.
--Materially reduced counterparty concentration risks such that EBITDA
from any single offtaker is consistently less than 15%;
--High likelihood of recontracting major PPAs at a level that is similar
to existing pricing levels with similar durations.
Negative: Future developments that could lead to negative rating action
--On a consolidated basis, FFO lease adjusted gross leverage above 7.5x
on a sustained basis; On a distribution only basis, recourse
debt/distribution above 5.5x on a sustained basis;
--If the major PPAs experience unexpected and material price reduction
from current levels or termination;
--If more than 50% of total revenue becomes uncontracted;
--The yieldco transaction, if executed, leads to material structural
subordination, cash leakage or additional yieldco or sponsor debt such
that they cause credit metrics to breach the above-outlined negative
FULL LIST OF RATING ACTIONS
Fitch has assigned the following ratings and Outlook:
--Long-term IDR 'B+'; Stable Outlook.
--$30 million super senior revolver (guaranteed) 'BB+/RR1';
--$400 million 7.125% senior secured notes due 2019 (guaranteed)
Date of Relevant Rating Committee: Sept. 28, 2015
Additional information is available on www.fitchratings.com
Corporate Rating Methodology - Including Short-Term Ratings and Parent
and Subsidiary Linkage (pub. 17 Aug 2015)
Recovery Ratings and Notching Criteria for Utilities (pub. 05 Mar 2015)
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