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Rating Action:

Moody's assigns B2 to ContourGlobal's proposed $350 million senior secured term loan

05 Oct 2012

Approximately $350 million of term loan debt rated.

New York, October 05, 2012 -- Moody's Investors Service assigned inaugural ratings to ContourGlobal Power Holdings S.A. (Contour), including a Corporate Family Rating (CFR) of B2, a Speculative Liquidity Rating of SGL-3, and a B2 senior secured rating (LGD4 52%) to the company's proposed $350 million five year term loan. The term loan is unconditionally guaranteed by ContourGlobal L.P., the ultimate parent company, and is also guaranteed by substantially all of ContourGlobal L.P.'s first-tier subsidiaries. In addition, the capital stock of the first-tier subsidiaries, representing the equity ownership in the power projects, is pledged as security. The rating outlook is stable.

RATINGS RATIONALE

The B2 Corporate Family Rating reflects Contour's diverse and largely contracted generating portfolio, with some projects located in developing countries and exhibiting a high degree of business risk. The rating is constrained by the significant concentration of projected cash flow from just a few power plants: the Maritsa coal plant in Bulgaria, the Arrubal and Kramatorsk plants in Spain and the Ukraine respectively, and the KivuWatt plant currently under construction in Rwanda. Moreover, the rating takes into consideration Contour's continued expansion in higher credit risk developing economies with non-existent power markets.

Proceeds from the term loan are expected to be used to repay approximately $60 million of non-recourse project debt with the remainder available to fund future corporate growth opportunities.

Contour owns and operates 25 power projects representing approximately 2,518 MW of gross capacity operating in Europe, Africa, the Caribbean, South America, and the United States. Additionally, the company has five projects totaling 215 MW of generating capacity under construction. The generating capacity is a mix of coal, natural gas, wind, hydro, solar, biomass, and fuel oil. We view Contour's hedging program favorably as plants generally have long-term PPA's with local utility offtakers generally based on availability, rather than dispatch, and the PPA's generally have adjustment clauses in place to recover changes in fuel costs. In addition, Contour has long-term fuel hedges and O&M service agreements in place at many of its major projects.

In addition to traditional power generation, Contour also owns several quad generation facilities through its CG Solutions subsidiary, which generate electric, heat, cooling and CO2 for Coca-Cola bottling plants in Europe and Africa.

We anticipate that Contour's consolidated credit metrics will be somewhat strong for the rating including cash from operations before changes in working capital (cash flow) to debt of about 9-14% and cash flow interest coverage of about 2.4-2.8x over the medium-term. These metrics support the rating and help offset some of the project specific risks.

Our main project level concerns are as follows:

1. We calculate that Maritsa could contribute $30-50 million of distributions annually through 2017, representing 25-40% of total project distributions to Contour. However, there is uncertainty in the cash flows due to the high level of receivables owed to Maritsa by the sole power-offtaker NEK, the national Bulgarian utility. Maritsa has had high receivables outstanding since before Contour acquired the project. As of June 30, 2012, Maritsa's past due accounts receivables balance was €65 million along with €15.5 million of current receivables. We calculate that this represents about 110 days of revenues. We recognize Contour's efforts to reduce Maritsa's working capital through negotiations with NEK; however, it is not clear when or how the problem will be resolved.

2. KivuWatt is a new plant under development in Rwanda that will extract methane gas from Lake Kivu, transport it to land and use it for natural-gas fired generation. We believe constructing a new technology, lake gas extraction project in a developing country presents significant risks. Phase I of the project involves floating a gas extraction barge to extract the gas, constructing a pipeline to bring it onshore and building a 26 MW gas plant. This is expected to be online by the first quarter of 2013 after some project delays. The total cost of Phase I is $142 million. Phase II will install three additional gas extraction barges and total additional generating capacity of 75 MW and could be online by 2015. The project has a PPA with recovery of most costs of capacity and variable and fixed O&M. Approximately 64% of the total construction cost has been spent through mid August 2012 and actual spending has been at budgeted levels. Contour provided $55 million of guarantees to cover cost overruns and potential debt buydown. Beginning in 2014, KivuWatt is expected to provide about 8-10% of total projected distributions to Contour.

3. Contour also has significant exposure to Spain and Ukraine with its Arrubal and Kramatorsk plants. Both plants run well and have provided fairly predictable cash flows. However, we note the plants create significant exposure for Contour to these countries difficult political environments. We project Arrubal could provide about 10-28% and Kramatorsk could provide about 3-8% of total distributions.

Liquidity

Moody's SGL-3 rating reflects Contour's adequate liquidity profile. We project that Contour will generate sufficient internal cash flows to meet its operating obligations but expect external financing will be needed for growth capital expenditures. Contour, as a holding company, only owns equity interests in its operations at the project-level. The projects are generally fully encumbered with debt and they might be difficult to sell in a distressed situation due to the potential involvement of local governments or utilities. Any sales would also likely occur when market prices of similar projects are depressed. The SGL-3 rating reflects our expectation that Contour will enter a $35 million bank revolving credit agreement not long after term loan closing that will be used for short-term funding needs related to acquisitions and project development. We expect the credit facility will be pari passu with the term loan.

The term loan's maintenance covenants require an unconsolidated interest coverage ratio of at least 1.5x and an unconsolidated net leverage ratio of at most 5x initially and declining to 4x beginning in March 31, 2015. We project that covenant compliance could be tight in 2013 depending on Contour's ability to bring new projects online and reduce working capital at Maritsa.

Terms of the term loan require mandatory prepayment with 100% of excess cash flow and therefore the financial performance of Contour's portfolio will determine the degree of refinancing risk in 2017.

The stable outlook reflects the expectation that Contour will continue to finance its projects with a significant amount of debt at the operating levels while generally running the projects well and contractually hedging operating costs and revenues of the projects. An upgrade of Contour could occur if it reduces Maritsa's working capital, leading to improved distributions from the project, if it is able to bring KivuWatt Phases I and II online, and if it continues to exhibit a track record of completing new projects on time and on budget. A downgrade could occur if there is a deterioration in financial metrics; an increased likelihood of financial covenant violations; further delays or unsuccessful completion of the KivuWatt project, or further increases in the accounts receivable balance at Maritsa.

Contour's term loan rating was determined using Moody's Loss Given Default (LGD) methodology. Based on Contour's B2 CFR and a B2 PDR, and based strictly on the priority of claims within Contour parent, the LGD model suggests a rating of B2 (LGD4 52%) for the term loan. We included the planned credit facility in the LGD though it did not impact the notching.

The methodology used in this rating was the Unregulated Utilities and Power Companies published in August 2009. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.

REGULATORY DISCLOSURES

The Global Scale Credit Ratings on this press release that are issued by one of Moody's affiliates outside the EU are endorsed by Moody's Investors Service Ltd., One Canada Square, Canary Wharf, London E 14 5FA, UK, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that has issued a particular Credit Rating is available on www.moodys.com.

For ratings issued on a program, series or category/class of debt, this announcement provides relevant regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides relevant regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides relevant regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

Information sources used to prepare the rating are the following : parties involved in the ratings, parties not involved in the ratings, public information, and confidential and proprietary Moody's Investors Service information.

Moody's considers the quality of information available on the rated entity, obligation or credit satisfactory for the purposes of issuing a rating.

Moody's adopts all necessary measures so that the information it uses in assigning a rating is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

Please see the ratings disclosure page on www.moodys.com for general disclosure on potential conflicts of interests.

Please see the ratings disclosure page on www.moodys.com for information on (A) MCO's major shareholders (above 5%) and for (B) further information regarding certain affiliations that may exist between directors of MCO and rated entities as well as (C) the names of entities that hold ratings from MIS that have also publicly reported to the SEC an ownership interest in MCO of more than 5%. A member of the board of directors of this rated entity may also be a member of the board of directors of a shareholder of Moody's Corporation; however, Moody's has not independently verified this matter.

Please see Moody's Rating Symbols and Definitions on the Rating Process page on www.moodys.com for further information on the meaning of each rating category and the definition of default and recovery.

Please see ratings tab on the issuer/entity page on www.moodys.com for the last rating action and the rating history.

The date on which some ratings were first released goes back to a time before Moody's ratings were fully digitized and accurate data may not be available. Consequently, Moody's provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Mitchell F Moss
Analyst
Infrastructure Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Michael G. Haggarty
Senior Vice President
Infrastructure Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's assigns B2 to ContourGlobal's proposed $350 million senior secured term loan
No Related Data.
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