Fitch Rates ContourGlobal Power Holdings' Senior Secured Notes 'BB-'

NEW YORK--()--Fitch Ratings has assigned a 'BB-/RR3' rating to ContourGlobal Power Holdings S.A.'s (CGPH) $100 million 7.125% Senior Secured Notes due June 2019. The proceeds along with cash on balance sheet will be used to repay the $150 million bridge loan. The rating primarily benefits from a guarantee from CGPH's parent ContourGlobal L.P. (CGLP) which carries a Fitch 'B+' Long-term Issuer Default Rating (IDR) with a Stable Outlook. The security ratings at CGPH are notched based on a recovery analysis that reflects the IDR and the priority ranking of the debt obligations in a hypothetical default scenario.

KEY RATING DRIVERS

CGLP's IDR primarily reflects its relatively stable earnings from long term contracts and regulated earnings which account for approximately 91% of total revenue between 2014 and 2021. Power Purchase Agreements (PPAs) have a weighted average life of approximately 12 years. Majority of PPAs are either capacity based which covers fuel cost and other variable costs or with fixed long term prices with inflation pass-through. Most PPA offtakers hold an investment grade credit rating.

The IDR also considers the improving geographic diversification of CGLP's generation fleet, although counterparty concentration remains a primary credit concern. CGLP's two largest projects Maritsa in Bulgaria and Arrubal in Spain will represent approximately 27% and 14% of 2015 EBITDA. With acquisitions and new projects coming into service, the combined EBITDA of these two projects could decline to 36% but remain substantial. Fitch views positively the settlement between Natsionalna Elektricheska Kompania EAD (NEK) and Maritsa. CGLP was required to reduce capacity prices by 15% and NEK will pay CGLP approximately EUR88 million in net proceeds, eliminating the uncertainty from NEK's chronic late payments.

CGLP's operating environment will remain challenging. Fitch believes that European wholesale power prices will remain low through 2019. CGLP has limited financial flexibility as project assets are largely encumbered and subject to various security restrictions under the project financing agreements that could be very complex and prevent upstream distribution to CGLP.

CGLP's credit metrics are at the low end of the range for the rating. There is limited headroom in the assigned 'B+' rating level. Fitch evaluates CGLP's credit metrics both on a consolidated basis and a distribution basis. As several projects have been acquired or will become fully operational in 2015 - 2016, Fitch projects consolidated FFO lease adjusted leverage to decline to 6.3x in 2017 from the current 8x. On a distribution only basis, Fitch projects recourse debt/distribution to average 4.8x for the next three years. The distribution cash flow is structurally inferior to cash flow at the operating company level.

Recovery Analysis

The 'BB-/RR3' for CGPH's senior secured notes are based on Fitch's recovery waterfall and incorporates the limit on total security available to the secured debtholders under the credit agreement. Fitch values CGLP's equity interest in its operating subsidiaries at $462 million under a distressed scenario. The 'RR3' rating for the senior secured notes reflects a one-notch positive differential from the 'B+' IDR and indicates good recovery of principal and related interest of between 51% -70%.

KEY ASSUMPTIONS

--Approximately $140 million equity investment for committed acquisitions or construction in 2015;

--Continuation of Arrubal's reduced capacity payment from the system operator until government contract expires in 2017;

--Receives NEK payment of EUR 88 million regarding to overdue receivables in 2015;

--Capacity payment from NEK reduced by 15% starting June 2015;

--Maritsa and Arrubal availability factors are at required level of 82% for Maritsa, and 86%-93% for Arrubal. Fitch notes that actual availabilities have been higher historically.

RATING SENSITIVITIES

Positive: Based on projections for the next 3 - 5 years, it is unlikely that CGLP will be upgraded. Nevertheless, future developments that may lead to a positive rating action include:

--On a consolidated basis, FFO lease adjusted gross leverage below 5.0x on a sustained basis; On a distribution only basis, recourse debt/distribution below 3.0x on a sustained basis.

--Materially reduced counterparty concentration risks such that EBITDA from any single offtaker is consistently less than 15%;

--High likelihood of re-contracting major PPAs at a level that is similar to existing pricing levels with similar durations.

Negative: Future developments that could lead to negative rating action include:

--On a consolidated basis, FFO lease adjusted gross leverage above 7.5x on a sustained basis; On a distribution only basis, recourse debt/distribution above 5.5x on a sustained basis;

--If the major PPAs experience unexpected and material price reduction from current levels or termination;

--If more than 50% of total revenue becomes uncontracted.

Date of Relevant Rating Committee: Sept. 24, 2015.

Additional information is available on www.fitchratings.com

Applicable Criteria

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 17 Aug 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869362

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Contacts

Fitch Ratings
Primary Analyst
Julie Jiang
Director
+1-212-908-0708
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Arkadiusz Wicik, CFA
Senior Director
+4822-338-6286
or
Committee Chairperson
Shalini Mahajan, CFA
Managing Director
+1-212-908-0351
or
Media Relations:
Alyssa Castelli, +1 212-908-0540
alyssa.castelli@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Julie Jiang
Director
+1-212-908-0708
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Arkadiusz Wicik, CFA
Senior Director
+4822-338-6286
or
Committee Chairperson
Shalini Mahajan, CFA
Managing Director
+1-212-908-0351
or
Media Relations:
Alyssa Castelli, +1 212-908-0540
alyssa.castelli@fitchratings.com