Fitch Affirms ContourGlobal L.P.'s IDR at 'B+'; Outlook Stable

NEW YORK--()--Fitch Ratings has affirmed ContourGlobal L.P.'s (CGLP) Long-Term Issuer Default Rating (IDR) at 'B+'. The Rating Outlook is Stable. In addition, Fitch affirmed its rating for ContourGlobal Power Holdings S.A.'s (CGPH) super senior revolver due 2018 at 'BB+/RR1' and the senior secured notes due 2021 at 'BB-/RR3'. CGPH is a financing subsidiary of CGLP and the ratings of its debt obligations primarily benefit from a guarantee from CGLP.

The individual security ratings at CGLP are notched based on a recovery analysis that reflects the IDR and the priority ranking of the debt obligations in a hypothetical default scenario.

A complete list of rating actions follows at the end of this release.

KEY RATING DRIVERS

--Relatively stable earnings supported by long-term contracts;

--Kosovo project could potentially impair credit quality;

--Maritsa payment received;

--Counterparty concentration risk remains high albeit declining.

CGLP's IDR primarily reflects its relatively stable earnings from long-term contracts and regulated earnings which account for an average of 90% of total revenue between 2016 and 2021. Power purchase agreements (PPAs) have a weighted average life of approximately 12 years. PPAs are either capacity-based which covers fuel cost and other variable costs or with fixed long-term prices with inflation pass-through. 42% of the off-takers by capacity are investment grade, 42% are non-investment grade and 16% are not rated. With political risk insurance (PRI), approximately 80% of off-takers by capacity are investment grade.

Fitch believes the Kosovo lignite power plant project could potentially impair CGLP's credit quality due to the large size of the project, long construction period and a weak counterparty. In December 2015, CGLP reached preliminary agreement with the Kosovo government to build a 500MW lignite power plant to replace an old lignite plant. Project is estimated to cost over EUR1 billion. Management has publicly indicated that it will use 70% project debt. Ground breaking is expected to start in 2017-2018 and project is expected to complete in 2022. The off-taker of the PPA is expected to be Kosovo Energy Corporation (KEK, an entity owned by the Kosovo Government; not rated). Largely reflecting historical legacies, Kosovo remains one of the poorest countries in Europe and is struggling with a high unemployment rate. The reasonable cost of this project has been challenged by various sources. To partially offset these concerns, Fitch notes that CGLP has experience in building projects in developing countries. At this time, CGLP has not made any binding commitment to invest in the project. Fitch will closely monitor the progress of the project and its impact on CGLP's credit quality.

Counterparty concentration risk remains high but is declining. For 2016, three projects - Maritsa, Arrubal and Inka - are expected to represent approximately 40% of CGLP's total proportionate EBITDA (CGLP's share). The percentage has declined from 2014's 63%, primarily as 1.1GW of new capacity has been acquired or completed since 2014.

Fitch views the settlement between CGLP's Maritsa East (Maritsa) and Natsionalna Elektricheska Kompania EAD (NEK) positively. In April 2016, Maritsa received approximately EUR143 million of overdue receivables from NEK. The 15% reduction in capacity payment took effect upon the receipt of the payment.

Fitch evaluates CGLP's credit metrics both on a consolidated and parent-only cash flow basis. The consolidated method acknowledges that although project debt is non-recourse, CGLP will likely provide financial and operational support in times of stress for its large projects. Many projects such as Maritsa are contracted with government or quasi-government counterparties, thus could be difficult to terminate. Fitch projects that consolidated FFO adjusted leverage from 2016 through 2019 could range from 5x to 6x, without the Kosovo project. On a parent-only cash flow basis, Fitch projects that the recourse debt/APOCF (available parent-only cash flow) will likely average 5x during the same period. The parent-only cash flow metric is based on distribution from projects and is structurally inferior to cash flow at the project company level. If the Kosovo project moves forward, Fitch estimates that these credit metrics will likely weaken during construction and recover after construction. However, details of this project are largely unknown at this time.

Recovery Analysis

The 'BB+/RR1' ratings for CGPH's super senior revolver and 'BB-/RR3' for its senior secured notes are based on Fitch's recovery waterfall analysis. Fitch values CGLP's equity interest in its operating subsidiaries at approximately $500 million under a distressed scenario. The 'RR1' rating for the revolver reflects outstanding recovery prospects given default with securities historically recovering 91%-100% of current principal and related interest and reflects a three-notch positive differential from CGLP's 'B+' IDR. 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

Fitch's key assumptions within our rating case for the issuer include:

--Assume equity contribution of $50 million 2016;

--Reduced capacity payment from NEK by 15% starting April 2016;

--Maritsa and Arrubal availability factors are at required level of 82% for Maritsa, and 86%-93% for Arrubal (actual availability has been higher historically);

--Fitch's projections for the rating case do not include the Kosovo project, as no binding commitment has been made at this time.

RATING SENSITIVITIES

Positive: Future developments that may lead to a positive rating action include:

--On a consolidated basis, FFO adjusted leverage below 5x on a sustained basis; on a parent-only basis, recourse debt/APOCF below 4x on a sustained basis;

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

--High likelihood of re-contracting major PPAs at pricing levels that are similar to existing levels with similar terms.

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

--On a consolidated basis, FFO adjusted leverage above 7x on a sustained basis; on a parent-only basis, recourse debt/APOCF above 6x on a sustained basis;

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

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

--If future projects, including the Kosovo project, experience material cost overruns and delays, are not prudently financed and/or encounter substantial political interference, causing financial distress at the project level and/or at the parent level such that CGLP breaches the guideline ratios aforementioned on a sustained basis.

Fitch has affirmed the following ratings:

CGLP

--Long-Term IDR at 'B+';

CGPH

--Senior secured revolver at 'BB+/RR1';

--Senior secured debt at 'BB-/RR3'.

The Rating Outlook is Stable.

Date of Relevant Rating Committee: Sept. 22, 2016

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/site/re/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