TEXT-S&P assigns ContourGlobal LP 'B+' corporpate credit rating
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) Complete ratings information is available to subscribers of RatingsDirect on 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 www.standardandpoors.com. Use the Ratings search box located in the left column.
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