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TEXT-S&P affirms Oleoducto de Crudos Pesados
April 25, 2012 / 8:06 PM / 6 years ago

TEXT-S&P affirms Oleoducto de Crudos Pesados

(The following statement was released by the rating agency)	
	
   Overview	
   -- On April 19, 2012, we lowered our corporate credit ratings on OCP's 	
sponsor, Repsol-YPF, to 'BBB-'from 'BBB' with a negative outlook. 	
   -- Standard & Poor's is affirming the 'BBB' issue-level rating on 	
Ecuador-based oil pipeline project OCP's $900 million senior secured bank 	
loan. 	
   -- The outlook is negative, following the downgrade on the ratings on 	
Repsol, and reflecting the possibility of a future ratings downgrade on Repsol.	
	
Rating Action	
On April 25, 2012, Standard & Poor's Ratings Services affirmed its 'BBB' 	
rating on the $900 million senior secured bank loan due 2018 of Ecuador-based 	
oil pipeline project Oleoducto de Crudos Pesados (OCP). The outlook is 	
negative.	
	
Rationale	
	
On April 19, 2012, Standard & Poor's downgraded Spain's oil and gas company, 	
Repsol YPF S.A. to 'BBB-'from 'BBB' after the Argentinean government's 	
decision to expropriate 51% of Repsol's shares in its Argentine subsidiary 	
YPF, S.A. The affirmation of the ratings on OCP reflects our opinion that, 	
despite the downgrade on Repsol, the credit quality of its sponsors will 	
continue to support OCP's bank loan rating at 'BBB'. We estimate that, in a 	
scenario in which the weakest rated performance guarantors, Repsol and 	
Anadarko, defaulted on the guarantee payment of their corresponding shipping 	
interest, the project would still be able to make debt payments fully and on 	
time if the other sponsors continued to comply with the shipping interest 	
payments. Nevertheless, the negative outlook reflects the possibility that a 	
downgrade of the credit rating on Repsol into the speculative grade rating 	
category could lead to a downgrade on OCP. 	
	
Standard & Poor's bases its 'BBB' rating on OCP's senior secured bank loan on 	
the creditworthiness of its several, but not joint, performance guarantors: 	
Repsol-YPF (BBB-/Negative/A-3), Occidental Petroleum Corp. (A/Stable/A-1), 	
PetroOriental Holding Ltd. (not rated), Anadarko Petroleum Corp. 	
(BBB-/Stable/--), and Petrobras Argentina S.A. (PASA; BB-/Negative/--; 	
formerly Petrobras Energia S.A.). Letters of credit from financial 	
institutions that we rate at or above 'BBB' support PASA and PetroOriental's 	
creditworthiness. Further, the transaction's contractual structure calls for 	
an initial shipper transportation agreement (ISTAs) between the sponsors and 	
OCP. Its advanced tariff payment structure--in the event of force majeure 	
(including expropriation of the pipeline)--isolate OCP from sovereign credit 	
risk. The guarantors are bound by "ship-or-pay" or advance tariff agreements, 	
even in a remote scenario in which the Ecuadorian government nationalizes the 	
pipeline or the guarantors' economic incentives decrease because of 	
disappointing oil exploration.	
	
In 2001, the sponsors of OCP's parent, OCP Ltd. (not rated), entered into 	
15-year ship-or-pay ISTAs with OCP for capacity on the pipeline, based on 	
guaranteed capacity volumes (subject to distance and quality adjustments). The 	
performance guarantee agreements from the sponsors' respective parent 	
companies support the obligations of each initial shipper under its ISTA. 	
Under the ship-or-pay provisions of the ISTAs and the related performance 	
guarantee agreements, the initial shippers absorb the project risks through 	
payments for volumes not transported and tariff adjustments for related cost 	
increases, including increases in interest payments on debt service. The ISTAs 	
also include advance tariff payments. Shipping interests mitigate the risk of 	
a downgrade resulting from mergers, acquisitions, or assignment of shipping 	
interests and guarantees. The provision that the guarantees are only allowed 	
to be transferred to an entity that Standard & Poor's rates 'BBB+' or higher, 	
pro rata prepayment of the underlying debt, the requirement that the original 	
performance guarantor and guarantee remain in place, and a ratings affirmation 	
by Standard & Poor's stating that the transfer, in and of itself, will not 	
cause us to lower the rating on the senior secured debt further mitigate the 	
risk of a downgrade. The current rating depends primarily on the strong 	
contractual structure of OCP's financing. We expect the contracts and 	
performance guarantees that support the current rating to continue to be 	
honored; however, if they are not, we would expect to lower the rating on the 	
debt by multiple notches.	
	
Originally, the sponsors needed this project to monetize their oil reserves 	
because the Trans-Ecuadorian Oil Pipeline System (SOTE) had limited capacity. 	
However, only two of the five initial shippers continue to transport oil 	
through OCP's pipeline. The pipeline's utilization rate has not met original 	
estimates--transportation volumes are about 30% of its capacity. Nonetheless, 	
the project's shippers have honored all scheduled payments to OCP under the 	
ISTAs, thereby stabilizing OCP's cash flow.	
	
The shippers' creditworthiness provides an adequate cushion for the company to 	
meet its scheduled financial obligations under the ISTAs. Moreover, even in a 	
scenario in which the guarantors with the weakest-rated performance, Repsol 	
and Anadarko, defaulted on their shipping interest payments and on their 	
guarantee payment of the corresponding shipping interest, the project would 	
still be able to make debt payments fully and on time if the other sponsors 	
continued to comply with their shipping interest payments. The project's 	
senior secured debt is payable in semiannual installments. OCP made its last 	
principal and interest payment, of $43.5 million, in December 2011. The next 	
debt service payment is due in June 2012, for a total of $44.7 million. The 	
project already has these funds in reserve. To date, about 42% of the $900 	
million bank loan has been repaid, leaving only $551.8 million outstanding.	
	
	
Liquidity	
We believe the project's liquidity is satisfactory. The project has a strong 	
debt service coverage ratio (DSCR), which we expect to average 2.28x 	
throughout the remaining life of the notes. The project's only additional 	
source of liquidity is a debt service reserve fund for the next principal and 	
interest payment. As of Dec. 1, 2011, the reserve fund held $45.8 million. The 	
project may distribute dividends as long as the DSCR exceeds 1.20x.	
	
	
Outlook	
The negative outlook on OCP reflects the possibility of a ratings downgrade on 	
Repsol, based on the weakened credit metrics following the nationalization of 	
YPF. In the absence of management actions, a rating downside could arise 	
because we expect Repsol's adjusted FFO to debt (excluding YPF and treating 	
Gas Natural as an equity affiliate) to fall short of the 25%-30% range we see 	
as a minimum for the 'BBB-' rating (using our normalized oil and gas pricing 	
assumptions). 	
	
A downgrade of Repsol to below 'BBB-'could lead to a downgrade on OCP's bank 	
loan rating, reflecting the credit quality deterioration of one of its key 	
sponsors.  	
	
Although we don't believe an upgrade is probable in the short-to-medium term, 	
it could be possible if the creditworthiness of the guarantors with the 	
highest participation in the project improves significantly.	
	
Related Criteria And Research	
     -- Research Update: Spain's Repsol-YPF Downgraded To 'BBB-' On 	
Expropriation Of YPF; Outlook Negative; April 19, 2012	
     -- European Legal Criteria For Structured Finance Transactions, Aug. 28, 	
2008	
     -- Updated Project Finance Summary Debt Rating Criteria, Sept. 18, 2007	
	
	
Ratings List	
Affirmed	
Oleoducto de Crudos Pesados (OCP) 	
    Senior Secured debt rating                BBB/Negative	
	
 (Caryn Trokie, New York Ratings Unit)

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