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Rating Action:

Moody's changes outlook to stable on Solveig's Baa2; affirms ratings

07 Aug 2014

London, 07 August 2014 -- Moody's Investors Service, (Moody's) has today affirmed the Baa2 rating of the USD650 million 4.00% senior secured notes due 2027 of Solveig Gas Norway AS (Solveig). Concurrently, Moody's has affirmed the Baa2 rating of the NOK1 billion 5.32% senior secured bond due 2027 issued under its NOK12 billion euro medium-term note (EMTN) programme rated Provisional(P)Baa2. The outlook on all ratings has been changed to stable from negative.

RATIONALE FOR CHANGE IN OUTLOOK

The change in outlook to stable from negative reflects the recent conclusion of the restructuring of the company's facilities to ensure (1) a stronger and more stable Debt Service Cover Ratio (DSCR) of at least 1.4x over the life of Solveig's licence which Moody's believes is commensurate with the current rating; and (2) the removal of refinancing risk. A strengthening of Solveig's financial profile was required in order to stabilise the rating following the Ministry of Petroleum's ("MPE") decision to confirm tariff reductions on new bookings for the transmission of gas after May 2013 to take effect from 1 October 2016.

Solveig's financial restructuring has been achieved through the following: (1) a reduction in overall leverage through prepayment of NOK900 million of bank debt; (2) improvements in the amortisation profile of both the NOK1 billion bond as well as the revised bank facilities of NOK4.4 billion, which have also been extended from 2019 until 2021. As a result, principal and interest payments are now better aligned with the company's forecast revenues over the life of the licence which results in stronger DSCRs, particularly towards the back end of the transaction; (3) back up facilities are reduced from NOK1.5 billion to NOK1.0 billion but are extended to 2021. They continue to provide adequate liquidity as they are sized to meet the company's future liquidity and investment needs that are lower than in the past; (4) bank debt is 100% hedged; and (5) protections under the existing security and covenant package remain unchanged. The lenders benefit from borrowing covenants, including a minimum DSCR and a debt service reserve account (DSRA) equal to six months' debt service.

RATINGS RATIONALE

In addition, the Baa2 rating reflects (1) Solveig's limited volume risk over the next few years, with approximately 80% of volumes booked until 2020; (2) part ownership in strategically important Norwegian gas transmission assets; and (3) the strong competitive position of Gassled's network compared with Russian gas imports and liquefied natural gas (LNG), given the company's low delivery costs.

However, the rating is constrained by (1) a regulatory regime that we consider significantly less supportive and predictable then previously, given the material and unexpected tariff reductions that have been introduced; (2) a degree of volume risk after the end of this decade if replacement rebookings do not materialise or are booked with short time horizons; (3) the short remaining licence life; (4) certain weaknesses in the company's security package, which allows debtholders to assume ownership mainly in the form of untested debt holder rights of step-in over operating bank accounts, but not operating assets; (5) the complexity of repair works to Gassled's assets, given the size of the facilities and depth of the pipelines in certain areas; and (6) the risk of trawler and anchor damage to the network, given its location, beneath one of the world's busiest shipping lanes.

The MPE is cutting the 'K' (return on assets) element of the tariff by 90% for the vast majority of new volume bookings from 1 October 2016. The effect of the new tariff is tempered by the fact that volumes that are already booked will remain on the old tariff until the bookings expire. Moody's expects that the change in tariffs will have a material impact on Solveig's revenues from 2020 until the expiry of the licence.

WHAT COULD CHANGE THE RATING UP/DOWN

Moody's does not currently expect upward rating pressure. However, if the various stakeholders in Gassled are successful in appealing the decision by the MPE, and the decision to lower tariffs is reversed, positive pressure could develop on the rating.

Negative pressure could develop in case of (1) further significantly adverse regulatory development; (2) failure to replace expiring contracts within a reasonable time frame; and/or (3) a significant increase in capex that was not matched by additional revenues, shareholder equity or other forms of support such that DSCRs weakened below 1.4x.

The principal methodology used in this rating was Regulated Electric and Gas Networks published in August 2009. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

Solveig Gas Norway A.S. is a special purpose entity which owns a 25.55% direct and indirect interest in Gassled, an unincorporated joint venture which owns the high pressure Norwegian sub-sea gas network and associated gas processing and export facilities. The network connects the Norway-based gas producing platforms in the North Sea and the Norwegian Sea to export points in the UK, France, Belgium and Germany. The network operations and upgrade activity is undertaken by Gassco (not rated), which is 100% owned by the Norwegian government (Aaa stable).

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain 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 certain 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 certain 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.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this rating action, and whose ratings may change as a result of this rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

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.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Helen Francis
VP - Senior Credit Officer
Infrastructure Finance Group
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Monica Merli
MD - Infrastructure Finance
Infrastructure Finance Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Releasing Office:
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's changes outlook to stable on Solveig's Baa2; affirms ratings
No Related Data.
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