OREANDA-NEWS. March 23, 2015. Fitch Ratings has assigned AquaSure Finance Pty Ltd's (AquaSure Finance) proposed US private placement notes an expected rating of 'A-(EXP)'. The Outlook is Stable. AquaSure Finance is the financing vehicle for Australia-based AquaSure Pty Limited (AquaSure).The rating is in line with AquaSure Finance's existing bonds and bank debt. The final rating is contingent upon the receipt of final documents conforming to information already received.

The issuer intends to raise the equivalent of USD250m, with the final amount to be determined following investor feedback. AquaSure Finance intends to use the proceeds to repay part of the AUD1.25bn bank debt that matures in October 2016. The notes are expected to have a term of 12 years, and will include the following:

USD Series 2015A Fixed Rate Notes; and
AUD Series 2015B Floating Rate Notes.

KEY RATING DRIVERS
The rating takes into account the stable cash flow provided by AquaSure's concession, which runs through to 2039, to design, build, operate and maintain a 150 gigalitre/year desalination plant and associated infrastructure near Melbourne, Victoria, under a public-private partnership. The issuance of the proposed bonds is positive for AquaSure, primarily because it decreases the refinancing task for the debt maturing in October 2016, it extends the average maturity of AquaSure's debt, and it results in a broader spread of bullet maturities.

Robust Revenue Profile: AquaSure benefits from the State of Victoria's (the State) strong credit, from which it receives a monthly payment in return for operating and maintaining the project. AquaSure faces no price or volume demand risk since payments are made regardless of whether the State calls upon the plant to produce water or not. The project is not required to produce water in the current year ending 30 June 2015 due to the presence of adequate water levels in Melbourne-area reservoirs. The risk of revenue abatement, resulting from a failure to meet water production or other requirements, is effectively passed through to the third-party operator, subject to a cap. The project's Revenue Risk attribute is assessed as "Stronger".

Cost Pass Through: A joint venture of Degremont and Thiess Services (the O&M JV) operates and maintains the project, including asset replacement, under a set-price contract for the life of the concession. The partners take on the risk of cost overruns, backed by joint and several guarantees from their parent companies (Suez Environnement and Leighton Holdings), and security bonding. Electricity is provided by AGL Sales Pty Ltd under a fixed-price contract and guaranteed by AGL Energy Ltd, one of Australia's largest energy utilities. The Operating Risk attribute is assessed as "Stronger".

Proven Technology: The plant uses a modular design based on proven technology, with 7.5% excess capacity above the highest potential water requirement. The facility was subjected to a number of tests, including a 30-day test at full output, which it passed with comfortable margins. Separate energy performance testing demonstrated energy usage was significantly better than target levels. AquaSure holds a maintenance and repairs account that is sufficiently funded to meet the next 12 months of budgeted asset replacement costs. Infrastructure Development and Renewal Risk is assessed as "Midrange".

Refinancing Risk Well-Managed: The AUD3.75bn of senior debt is exposed to refinancing risk. However, the risk is partially mitigated through a broad spread of debt maturities, and a 50-50 sharing with the State of any losses due to higher refinancing margins. Base rates are fully hedged until 2020, after which the base rate risk is passed to the State. The 2014 issuance of bonds, along with the refinancing in October 2013 of the project's entire senior debt facilities in the bank market and a further AUD250m refinancing of bank facilities in February 2014, demonstrate AquaSure's adequate access to debt markets. The current issuance further extends the company's track record. The Debt Structure Risk attribute is assessed as "Midrange".

Adequate Debt Service Metrics: The minimum debt service coverage ratio (DSCR) is 1.33 in Fitch's rating case, which is acceptable for this rating level given the pass through of most O&M costs to the O&M JV on an uncapped basis. The joint and several parent guarantees mean that two strongly rated counterparties would need to default before AquaSure became exposed to these costs. Without that guarantee, higher debt coverage margins would be required to attain an 'A-' rating.

RATING SENSITIVITIES
A significant deterioration in the credit profile of the State, the parent guarantors of the O&M contractor, or the energy provider, could put pressure on the ratings on AquaSure Finance's bonds. They could also come under pressure should it experience difficulty in refinancing its debt in advance of maturities, or should its debt margins increase to a level that has a material adverse effect on debt service coverage ratios.