TEXT-S&P assigns ContourGlobal LP 'B+' corporpate credit rating

Fri Jan 18, 2013 4:38pm EST

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Overview
     -- We have assigned a 'B+' corporate credit rating (CCR) to ContourGlobal 
L.P.
     -- We withdrew our preliminary 'B+' CCR on ContourGlobal Power Holdings 
S.A. and our preliminary 'BB-' rating on CGPH's proposed $350 million senior 
secured notes.
     -- The stable outlook on the CCR reflects our view of the portfolio's 
diversified nature in terms of geography, technology, and counterparty 
exposure.

Rating Action
On Jan. 18, 2013, Standard & Poor's Ratings Services assigned its 'B+' 
corporate credit rating (CCR) to ContourGlobal L.P. (CG), a developer of 
electric power generation and district heating assets. At the same time, we 
withdrew our preliminary 'B+' corporate credit rating on ContourGlobal Power 
Holdings S.A. (CGPH), a 100% owned subsidiary of CG that was to benefit from a 
guarantee from both CG and its project-owning subsidiaries. We also withdrew 
our preliminary 'BB-' rating on CGPH's proposed $350 million senior secured 
notes due 2019 after the company decided not to proceed with that debt 
issuance. The outlook on the CCR is stable.

Rationale
Standard & Poor's Ratings Services rating on CG is 'B+'. The outlook is 
stable. The rating reflects the application of our project developer 
methodology. We view the financial profile to be "aggressive" and have 
assigned a quality of cash flow (QCF) score of 8, equating to a weak business 
profile.

In October 2012, we assigned a preliminary rating on CG and on CGPH, as well 
as on a planned five-year $350 million term loan B issued by CGPH. The debt 
proceeds were to be used mainly to acquire or construct new projects, with a 
small portion used to repay some existing project-level debt. However, the 
company has since decided not to proceed with that planned debt issuance.  
Without the new debt at CGPH, the consolidated debt for CG and its portfolio 
falls to about $1.7 billion from $2.1 billion. 

CG receives the residual cash flow distributions of a portfolio of 21 
projects, with 16 in operation and another five in various stages of 
construction, totaling about 2.77 gigawatts (GW) of gross generation that CG 
either entirely or partially owns. Although CG has an active development 
pipeline, without a debt issuance we consider the most likely scenario one in 
which projects in construction will be completed but no additional projects 
are added to the portfolio.

Given the corporate structure of nonrecourse projects that provide equity 
distributions to CG, our analysis of CG's credit strength uses our project 
developer methodology, under which we assign QCF scores to the different cash 
streams coming into CG from each project in the asset portfolio. The QCF score 
reflects our opinion of the dividend stream's potential volatility. Standard & 
Poor's QCF scale ranges from '1' to '10', with '1' being the most stable. 
Project-level QCF scores are largely influenced by the location of projects 
(with respect to political risk and geography), project-level covenants that 
affect a projects' ability to distribute cash to sponsors, operational 
history, exposure (if any) to foreign exchange risk, and the terms of key 
project contracts such as power purchase agreements (PPAs), and fuel supply 
agreements.

We have assigned a QCF score of '8' to the portfolio, with currency and 
country exposure, relatively weak counterparties, construction and operational 
risk, and some technology risk (particularly at the Rwanda lake-gas project) 
offsetting the approximately 90% contracted revenue.

We have assigned a "weak" business risk profile and an "aggressive" financial 
risk profile.

We do not consider CG separate from its private equity owners. Although CG 
includes separateness provisions, we do not anticipate receiving a 
nonconsolidation opinion from the partnership owners of CG, and thus CG does 
not meet our criteria definition of a bankruptcy-remote special-purpose 
entity. The lack of separation from the parents means that we did not assess 
CG completely separately from the credit risk of its parents. The private 
equity owners have the ability to leverage up themselves, and this may affect 
CG's continued operation. Therefore, the CG rating is limited to the 'B' 
category even before the assessment of the portfolio QCF score.

The rating on CG reflects our view of the following weaknesses:
     -- The portfolio has significant concentration risk. If we assume no 
projects are added to the current portfolio, the largest two assets -- 
Maritza, a Bulgarian coal plant, and Arrubal, a Spanish combined-cycle gas 
plant -- contribute 52% of forecast cash flow for debt service during the next 
seven years. 
     -- CG relies on substantial distributions from jurisdictions with 
considerable regulatory and operating uncertainties.
     -- The KivuWatt project in Rwanda, which we anticipate will provide 8% of 
cash flow for the current portfolio, plans to use methane harvested from 
suspension in Lake Kivu. This technique has not yet been proven on a 
sustainable commercial scale, so the project has sizable operational risks.
     -- The company's business strategy is dependent on smoothly working 
credit markets for additional debt issuances and refinancing planned at the 
individual project level, with the management base case including assumed debt 
issuance at six projects during the term of this rated debt.
     -- Many regions of operations are facing political uncertainty.

Partly offsetting the above weaknesses, in our view, are the following 
strengths:
     -- Exposure to merchant power markets is limited, with fewer than 90% of 
current revenue contracted or regulated.
     -- Regional, technology, and fuel source diversification provide benefits.
     -- CG has an experienced management team and well-developed operations 
team. Although the company is six years old, the core of the management team 
previously worked at The AES Corp. (BB-/Stable), with more than 10 years of 
responsibility for operations of a similar portfolio during that time.
     -- Political risk insurance exists for projects in speculative-grade 
countries, improving potential recovery if a project is damaged, shut down, or 
expropriated, and providing some incentive for counterparties to meet 
contractual agreements.
     -- CGPH has a history of strong operations and meeting improvement 
targets since 2005 at its generation and distribution businesses.
     -- The portfolio is tolerant to foreign exchange movements similar to the 
worst experienced in the past five years.

Overall, cash flow strength under all sensitivities exhibits a degree of 
robustness commensurate with a 'B+' CCR. We also note that the management base 
case scenario includes what we consider achievable assumptions for PPA revenue 
(including only minimum amounts under PPAs).

Consolidated debt was a little more than $800 per kilowatt at the end of 2012 
for the 2.5-megawatt current portfolio, in terms of net ownership of 
generation. This level of debt is associated more with the speculative-grade 
rating category. On a consolidated basis, the debt at the parent and all 
subsidiaries is about 50% of capital.

Liquidity 
Because there is no debt at the parent level, but as the company is seeking to 
issue some form of debt at the parent level during the next 12 months, we 
consider CG's liquidity to be "strong." 

Liquidity at CG comes from operational cash flow and reserves built into the 
financings at the individual project level (with this liquidity accessible 
through the guarantees that these project companies provide to the issuer). At 
this rating level, the underlying projects are adequately financed by their 
own debt service and maintenance reserves. 

Outlook
The stable outlook reflects our view of the portfolio's diversified nature in 
terms of geography, technology, and counterparty exposure. It also reflects 
the high level of contracted revenue under offtake agreements and the 
exclusion of potential contract extensions in the corporate projections.

Although the portfolio is exposed to country risk in a number of emerging 
markets, the anticipated distributions to CG offer substantial cash flow, and 
no debt is held at the CG level. 

We are unlikely to raise the rating because of exposure to emerging markets 
and construction risk at some projects. We could lower the rating if operating 
costs escalate well above projections or if construction on new projects is 
substantially delayed.

Related Criteria And Research
     -- Rating Criteria for Project Developers, Sept. 30, 2004
     -- Credit FAQ: Knowing The Investors In A Company's Debt And Equity, 
April 4, 2006
     -- Criteria For Special-Purpose Entities In Project Finance Transactions, 
Nov. 20, 2000

Ratings List
Ratings Assigned

ContourGlobal L.P.
 Corp cred rtg               B+/Stable/--

Rating Withdrawn
                             To     From
ContourGlobal Power Holdings S.A.
 Corp cred rtg               NR     B+(prelim)/Stable/--
 $350 mil nts (proposed)     NR     BB-(prelim)
  Recovery rtg               NR     2(prelim)


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the Global Credit Portal at www.globalcreditportal.com. All ratings affected 
by this rating action can be found on Standard & Poor's public Web site at 
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