Fitch Assigns First Time 'B+' IDR to ContourGlobal L.P.; Outlook Stable
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 credit rating.
Counterparty Concentration
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 in Spain.
Maritsa Settlement
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.
Credit Metrics
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.
Recovery Analysis
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%.
Liquidity
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.
KEY ASSUMPTIONS
--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.
RATING SENSITIVITIES
Positive:
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 include:
--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 guideline ratios.
FULL LIST OF RATING ACTIONS
Fitch has assigned the following ratings and Outlook:
CGLP
--Long-term IDR 'B+'; Stable Outlook.
CGPH
--$30 million super senior revolver (guaranteed) 'BB+/RR1';
--$400 million 7.125% senior secured notes due 2019 (guaranteed) 'BB-/RR3'.
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