Reuters logo
TEXT-S&P rates ContourGlobal Power term facility prelim 'BB-'
October 2, 2012 / 8:46 PM / in 5 years

TEXT-S&P rates ContourGlobal Power term facility prelim 'BB-'

Overview
     -- ContourGlobal Power Holdings S.A. is issuing a $350 million senior 
secured term loan with a five-year term. The loan is supported by a guarantee 
from ContourGlobal L.P., the parent.
     -- Loan proceeds will be used to retire some project-level debt and to 
acquire new projects.
     -- We are assigning our preliminary 'BB-' rating to ContourGlobal Power 
Holdings' senior secured term loan facility based on the corporate credit 
rating and the impact of a preliminary recovery rating of '2'.
     -- The preliminary rating on ContourGlobal and ContourGlobal Power 
Holdings remains 'B+', based on the guarantee provided by the parent.
     -- The outlook is stable.

Rating Action
On Oct. 2, 2012, Standard & Poor's Ratings Services assigned its preliminary 
'BB-' rating to ContourGlobal Power Holdings S.A.'s (CGPH) proposed $350 
million senior secured term loan facility due 2017. We also assigned the term 
loan a preliminary recovery rating of '2', indicating our expectation of 
substantial (70% to 90%) recovery in the event of a payment default. 
Assignment of a final rating hinges on our receipt and review of executed 
documentation. The final rating could differ if any terms change materially. 
The preliminary corporate credit rating on CGPH's parent, ContourGlobal L.P. 
(CG; a developer of electric power generation and district heating assets), 
remains 'B+'. The preliminary corporate credit rating on CGPH, a 100% owned 
subsidiary of CG that benefits from a guarantee from both CG and its 
project-owning subsidiaries, also remains 'B+'.

Rationale
Standard & Poor's preliminary rating on CG is 'B+'. Our preliminary rating on 
CGPH is also 'B+', based on a parental guarantee from CG. The outlook is 
stable.

Standard & Poor's preliminary rating on CGPH's $350 million five-year term 
loan facility is 'BB-'. We assigned the term loan a '2' preliminary recovery 
rating, indicating our expectation of substantial (70% to 90%) recovery in the 
event of a payment default. 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.

CG had initially planned to issue a non-amortizing, seven-year, fixed-rate 
senior secured bond, but now plans to issue a five-year, floating-rate term 
loan B of the same size ($350 million). The term loan includes provisions for 
a 1% annual required amortization, as well as a cash sweep. Under the cash 
sweep, initially all residual funds (less the greater of 10% of parent cash 
available for debt service or $15 million) will be used to pay down debt. 
After 2013, if leverage at the CG level drops to less than 2 to 1, the sweep 
amount drops to 75%. This sweep mechanism reduces refinancing risk for the 
debt, with the loan fully amortizing under our base case scenario within the 
five-year term. The loan covenants also include a minimum interest coverage 
ratio of 1.5 to 1 and a maximum net leverage ratio of 5 to 1 (dropping to 4 to 
1 in year three) on a nonconsolidated basis. For CG to issue additional debt, 
the interest ratio must exceed 2 to 1 and leverage must be less than 4.5 to 1 
(dropping to 3.5 to 1). The loan covenants also allow for existing debt at 
subsidiaries along with some additional debt for purposes such as working 
capital, capital leases, capital expenditure to meet government regulation or 
safely requirements, permitted guarantees, hedging in the ordinary course of 
business, and subordinated intercompany indebtedness. Limits are imposed on 
most of these items as a percentage of consolidated assets.

The proceeds of the term loan will be used to repay some existing 
project-level debt (EUR35 million at Maritza, the anticipated largest 
contributor to cash flow, and approximately $15 million at Asa Branca, a wind 
project) and to acquire or construct new projects from CG's development 
pipeline. CG owners are restricted from receiving proceeds. Debt service on 
the term loan will come from the residual cash flow distributions of a 
portfolio of 21 projects, with 16 in operation and five under construction, 
totaling about 2.77 gigawatts (GW) of gross generation that CG either entirely 
or partially owns.

Given the double leverage with debt at the issuer and debt at the projects, 
our analysis uses the 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. Cash flow quality suffers from the more obvious reasons, 
such as business volatility and cash flow from operations, but is also 
influenced by the evaluation of each investment in a portfolio such as the 
project's capital requirements and the cushion available before cash flow 
covenant breaches such as distribution traps at the project level. This is 
important to the rating because the residual cash flow from each investment 
(dividends or distributions paid to the developer) provides the means to 
support parent-level debt. Standard & Poor's QCF scale ranges from '1' to 
'10', with '1' being the most stable. Project-level QCF scores were 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.

Our assessment of business risk is "weak" and our assessment of financial risk 
is "aggressive."

The rating on CGPH 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. In a scenario in which the term loan proceeds are used to expand 
the portfolio, we anticipate that this percentage would decline to 44%.
     -- CGPH 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 growth strategy is heavily 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.
     -- Growth expenditure requirements are large.
     -- Debt will be denominated in U.S. dollars, but more than 50% of cash 
flow for debt service that we project will be generated in euros.

Partly offsetting the above weaknesses, in our view, are the following 
strengths:
     -- The debt includes a cash sweep mechanism, and is projected to fully 
amortize under our base case scenario within five years.
     -- 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.
     -- CGPH 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 AES Corp. (BB-/Stable) with more than 10 years of 
responsibility for operations of a similar portfolio during that time.
     -- Political risk insurance (PRI) exists for projects in 
speculative-grade countries, improving potential recovery if a project is 
damaged, shut down, or expropriated (for reasons including failure to honor 
arbitration awards relating to contract breaches), 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.
     -- The portfolio can continue to support debt service with the loss of 
all revenue from the largest project.

CG has a current hedging program separate from the portfolio that covers much 
of the currency risk between project-level primary currencies and U.S. 
dollar-denominated debt during the next several years.

CG has 16 projects in operation and another five in various stages of 
construction that management anticipates will reach operational status within 
the next three years. Management has also provided details for a number of 
projects that it considers likely to launch within the next three years from
the company's development pipeline. CG is in a high-growth phase and is 
issuing this debt with the intention of funding new projects (whether by 
acquisition or new construction), so we consider the company's targeted growth 
scenario as the most likely outcome.

At a project level, management has modeled most projects at minimum 
contractual PPA volume or availability thresholds, and assumes that 
operational performance will remain close to recent historical performance. 
Although many of the projects have the potential for offtake contract 
extensions, the current projections did not include this potential revenue, 
and our base case assumes none.

At the portfolio level, we focused on three primary scenarios: management's 
anticipated growth scenario; our base case, which also assumes portfolio 
growth; and a "no-growth" scenario, which has the same assumptions as our base 
case but assumes that projects in construction will be completed and that no 
additional projects will be added to the portfolio. We have also run a number 
of scenarios on top of these base cases to examine volatility of cash flow 
under various stress scenarios. The default management case also assumes a 
refinancing of the debt issuance at the same rate and tenor after seven years.

Our base case varies from the management base case with assumptions that:
     -- The yield on cash is zero.
     -- None of the assumed recapitalizations occur (and thus do not provide 
incremental cash flow to the parent from the recapitalization proceeds).
     -- Corporate expenses are 20% higher than management's case because of 
the complexity of managing such a disparate set of assets.

We tested portfolio volatility in two phases: individual projects and the 
portfolio as a whole.

In the individual projects phase, we examined each project in turn and 
adjusted inputs based on the actual contracts for energy offtake, fuel supply, 
operations and maintenance, and other items that are material to the project. 
We converted the cash flow from local currency into U.S. dollars, as that 
matches the currency of the debt obligation. Foreign exchange rates and 
inflation rate assumptions were also stressed. We then established QCF numbers 
for each project based on volatility together, with an assessment of transfer 
and convertibility risk and country risk in a number of the less developed 
areas. These stresses were made as consistent as possible across the portfolio.

For the portfolio as a whole, we ran a number of different scenarios to test 
the strength of cash flow across the portfolio in aggregate, and these are 
detailed in a later section. Maritza, a coal plant in Bulgaria, is the largest 
project within the portfolio, and even in the growth scenario this project is 
forecast to contribute more than 20% of cash flow to the debt issuer. We 
tested the impact of losing some or all revenue from this project, and also 
ran a scenario in which revenue was lost from the projects in the lowest-rated 
jurisdictions. Other scenarios include no under-construction projects reaching 
completion, the impact of a South American IPO, inflation and foreign exchange 
stress, unsuccessful expansion of the KivuWatt plant, and a combined stress 
that includes operational underperformance at key plants along with inflation 
and foreign exchange stress.

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

Debt per kilowatt (kW) at the issuer level is $166 per kW for the term debt, 
or $181 per kW including the revolving facility. Consolidated debt per kW is 
about $985 per kW in 2012 for the 2.5-megawatt current portfolio, in terms of 
net ownership of generation, and $1,002 per kW assuming the revolving facility 
is fully drawn. This higher 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.

For both a static portfolio and the growth portfolio, we project that the $350 
million term loan will be paid off by the end of the debt term. A large number 
of existing PPAs have contractual revenue that extends beyond the 2018 
refinancing date, providing CG with the opportunity to possibly refinance 
another loan at the maturity of this one, should any principal be left 
outstanding. 

However, without such refinancing, our base case scenario predicts that 
consolidated debt will decline to $770 per kW for the static portfolio and 
$645 per kW for the growth portfolio by the end of 2017.

In the non-growth case, a discounted cash flow of future contracted revenue 
from 2017 onward (excluding any anticipated non-contracted revenue, using a 
15% discount rate) from existing projects results in a present value of $585 
million, about 167% of the initial debt balance. In the non-growth scenario, 
the issuer has retained bond proceeds on the balance sheet and can also use 
this liquidity to pay off debt (another approximately 95% of debt principal). 
The company is unlikely to retain this cash (with its associated holding 
costs) for five years, but the non-growth scenario is a useful extreme case.

In our base case growth scenario, the bond proceeds are spent, and the 
resultant larger portfolio has future revenue of $912 million (including 
contracted revenue at current projects and anticipated revenue from finalized 
contracts at growth projects from the development pipeline). This is 
approximately 260% of the value of the initial debt balance. In both cases, 
future revenue provides solid coverage of $350 million of debt and increases 
the chance of successful refinancing.

We do not consider CG separate from its private equity owners. Although CG 
includes separateness provisions, we do not anticipate receiving a 
non-consolidation opinion from the partnership owners of CG, and thus CG does 
not meet our criteria definition of a bankruptcy-remote special-purpose 
entity. Although the credit documents include some leverage and interest 
coverage covenants, 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.

Recovery Scenario
Our recovery scenario is based on liquidity stress on the portfolio. We assume 
the term loan proceeds are spent on new projects, not all of which are 
successful. In this scenario, a number of key projects operationally 
underperform. Liquidity from the revolving facility, term loan proceeds, and 
project distributions is exhausted in 2015, and our recovery assessment is 
based on a present value of future contractual revenue at remaining operating 
plants. The outcome is a recovery of 71% and a recovery score of '2'. 

Liquidity
We consider CG's liquidity "adequate" given anticipated sources and uses 
during the next 12 months. We anticipate a $35 million revolving facility to 
be issued concurrently with the $350 million term loans. Apart from loan 
proceeds and existing cash, the revolving facility is the only source of 
liquidity. The bond proceeds will be held by the issuer (CGPH), and can be 
used in equity investment or loans to other subsidiaries of CG.

Given the planned debt issuance and the gradual deployment of proceeds, 
liquidity at the issuer level is initially high. In the no-growth scenario, 
this liquidity will remain with the issuer. In the growth scenario, we 
anticipate $38 million of term loan proceeds to be used in the first year, 
with projects generating $104 million of cash available for debt service, and 
first-year interest and required principal amortization of $38.5 million under 
the five-year term loan facility. 

CG provides additional liquidity in the form of operational cash flow and 
reserves built into the financings at the individual project level (with this 
liquidity accessible through the guarantees provided to the issuer from these 
project companies.) At the current rating, the underlying projects are 
adequately financed by their own debt service and maintenance reserves. We 
anticipate debt service coverage (DSC) of more than 2.0x in 2012 and an 
average of more than 2.5x during the term of the debt, providing a buffer of 
cash generated from operations. The minimum DSC is 2.28x for one year in the 
no-growth scenario. If any project experiences a major operational issue that 
requires an equity infusion, bond proceeds would be available unless already 
disbursed for growth projects. The company could also choose to refinance 
existing project-level debt. Judging by recent operational performance 
figures, we think the risk of major operational issues is low in most projects 
(with KivuWatt being one exception because of technology risk and lack of 
historical precedent).

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. It 
also reflects the amortizing nature of the loan. Although the portfolio is 
exposed to country risk in a number of emerging markets, the anticipated 
distributions to CG offer substantial DSC, and CG can continue to pay debt 
service even with the loss of revenue from a number of key projects.

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, if construction on new projects is 
substantially delayed, or if planned acquisition targets are not met.
On a consolidated basis, the debt to capital ratio is around 50%. If CG issues 
additional debt at the parent level, we would likely lower the rating.

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
ContourGlobal L.P.
ContourGlobal Power Holdings S.A.
 Corporate credit rating              B+(prelim)/Stable

New Rating

ContourGlobal Power Holdings S.A.
 $350 mil sr sec term ln due 2017     BB-(prelim)
  Recovery rating                     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.

0 : 0
  • narrow-browser-and-phone
  • medium-browser-and-portrait-tablet
  • landscape-tablet
  • medium-wide-browser
  • wide-browser-and-larger
  • medium-browser-and-landscape-tablet
  • medium-wide-browser-and-larger
  • above-phone
  • portrait-tablet-and-above
  • above-portrait-tablet
  • landscape-tablet-and-above
  • landscape-tablet-and-medium-wide-browser
  • portrait-tablet-and-below
  • landscape-tablet-and-below