Castor bonds hit as Spain halts project
LONDON, Oct 11 (IFR) - The European Investment Bank's first project-backed bonds have been hit hard by a statement from the Spanish government threatening to remove the "right of relinquishment" from the deal.
Under deal documents, if the project is abandoned, the equity investors, ACS and Dundee Energy, can hand it back to the Spanish government at book value. However, the Spanish government has now applied to the Supreme Court to remove this clause, after it ordered a halt to the project at the end of September due to seismic activity.
Bondholders are in theory also protected by the equity holders - a provision in the documents states that if the project's operations have not commenced by the long stop date of November 2014, ACS SCE will prepay the loan.
ACS SCE should be able to do this even if the Spanish government succeeds in removing right of relinquishment - Fitch points to revenues of EUR6.9bn in 2012 with net profit of EUR414m.
The bonds, which were quoted at around 104/5, have slipped down to par on this concern, as well as others stemming from underwater seismic activity at the project, an underwater gas storage facility.
However, one of the original lead managers said the trading volumes were extremely light, with the par pricing more of a live quote than a transaction price.
The bonds, which are supported by a mezzanine guarantee facility from the EIB, are supposed to be a flagship demonstration of the capacity of capital markets to finance infrastructure projects.
Projects like this need large sums of financing before they are completed, meaning they do not display the stable cashflows needed to tempt bond investors. Bringing bond cash to work on uncompleted projects therefore needs credit enhancement from other organisations, such as the EIB.
These bonds, issued from the Watercraft Capital vehicle in July, via BNP Paribas, Bankia, Credit Agricole, CaixaBank, Natixis, Santander and Societe Generale, were the first to use the new scheme. And at least another three deals are expected to follow in the remainder of the year.
Fitch said in August that: "The broad take-up of a 'BBB+' rated bond used to finance the Castor underground gas storage project in Spain indicates a growing appetite for European project finance debt."
Since the financing, however, the project has encountered challenges, as underwater seismic activity, measuring up to 3.6 on the Richter scale, has been detected since "cushion gas" started to be injected. The Spanish government has asked the National Geographic Institute for a detailed assessment of the seismic situation. (Reporting By Owen Sanderson and Robert Smith)
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