CHICAGO--(BUSINESS WIRE)--Fitch Ratings has downgraded to 'BB' from 'BBB-' the rating of SBM Deep Panuke S.A.'s (Deep Panuke or the issuer) $450 million senior secured notes due 2021. The Rating Outlook has been revised to Negative from Stable.
The downgrade is based on the weakened credit quality of SBM Offshore N.V. (SBM), the sponsor and guarantor of the issuer's performance obligations under the charter. The counterparty has the option to terminate the charter based on the bankruptcy or insolvency of the sponsor. Thus, a reduction in the credit quality of SBM increases the likelihood that the counterparty will acquire the termination option. Fitch notes that Encana has shifted PFC's production schedule from continuous to seasonal, and that reserve estimates have been revised downwards based on actual output levels.
KEY RATING DRIVERS
Revenue Risk: Stronger
Fixed Charter Contract: The charter contract with strong off-taker, Encana Corporation (Encana), insulates the project's cash flow from volume and price risk. The performance requirement linked to charter termination is not onerous and Fitch considers the possibility of performance-related termination remote. Fixed lease payments do not fluctuate based on the Deep Panuke production field center's (PFC or the project) operational performance, and revenue is not based on throughput.
Operations Risk: Stronger
Parent-Affiliated Operator: The PFC's operational complexity is mitigated by the involvement of parent SBM, which has extensive experience in offshore production, and by the full pass-through of all O&M costs to Encana. The operations contract exceeds the debt term, providing long-term operational stability.
Infrastructure Development and Renewal Risk: Stronger
Full Recovery of Life Cycle Costs: The project contracts establish a full pass-through of O&M costs to Encana, including typical project maintenance as well as any capital expenditures. This structure should enable the PFC to meet long-term performance expectations. The seven-year notes mature well within the 20- to 25-year useful life of the PFC's major structural and mechanical components.
Debt Structure: Midrange
Typical Debt Structure: Deep Panuke's debt structure includes conventional features. The senior secured notes are scheduled to fully amortize over a relatively short debt term and benefit from a six-month debt service reserve account (DSRA).
Stable Financial Profile: Fixed charter revenues align with level debt payments to create a flat debt service coverage ratio (DSCR) profile that should allow for consistent financial performance over the term of the notes. Fitch expects debt service coverage to average 1.26x, with a minimum of 1.26x.
SBM Credit Quality: Under the operating and charter contracts, bankruptcy or insolvency of SBM gives Encana the right to terminate these contracts without compensation to the project. As such, the project's rating is linked to the credit quality of SBM.
Peer Comparison: Deep Panuke's fixed lease payment structure is stronger than similar peers with revenues subject to reductions based on availability, force majeure or production levels. The ability to pass through nearly all costs provides Deep Panuke with a more stable projected financial profile than its peers, indicating that lower DSCRs are adequate to reach investment grade. Deep Panuke's low leverage and short debt tenor are also favorable features compared with similar availability-based projects.
Positive/Negative - SBM Credit Quality: Further deterioration or an improvement in the credit quality of SBM may change the likelihood of charter contract termination.
Negative - Weak Operational Performance: Persistent weak operational performance may suggest a higher likelihood of charter contract termination.
The weakening of SBM's credit quality increases the likelihood that the charter's termination provisions will be triggered due to the bankruptcy or insolvency of SBM. It is uncertain whether Encana would exercise its option to terminate the charter, which is the sole source of Deep Panuke's revenues. Fitch understands that Encana has shifted PFC's production schedule from continuous to seasonal, and that reserve estimates have been revised downwards based on actual output levels.
Deep Panuke is the owner of the PFC deployed in the Deep Panuke natural gas field off the shores of Nova Scotia, Canada. The project consists of a natural gas production platform with a contracted production capacity of 300 million standard cubic feet per day, which has been in commercial operation since Nov. 6, 2013. The project generates revenue pursuant to a charter-party contract with Encana for an initial term of eight years. Gas production and processing capacity is chartered exclusively to Encana. The PFC is responsible for accepting raw gas at the platform from all production wells, processing the gas to commercial quality and moving the processed gas to the export pipeline at the exit point of the platform. All other phases from exploration to delivery are Encana's responsibility.
Additional information is available at 'www.fitchratings.com'.
Rating Criteria for Availability-Based Projects (pub. 18 Jun 2013)
Rating Criteria for Infrastructure and Project Finance (pub. 12 Jul 2012)
Dodd-Frank Rating Information Disclosure Form