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Rating Action:

Moody's downgrades Solveig Gas Norway's senior secured debt ratings to Baa2 from A3; negative outlook

02 Aug 2013

London, 02 August 2013 -- Moody's Investors Service has today downgraded the senior secured debt ratings of Solveig Gas Norway AS (Solveig) by two notches to Baa2 from A3. Concurrently, Moody's has also downgraded the provisional rating on the company's NOK12 billion euro medium-term note (EMTN) programme by two notches, to (P)Baa2 from (P)A3. The outlook on the ratings is negative. This concludes the review for downgrade of the ratings initiated on 19 February 2013.

Solveig owns a direct and indirect stake totalling 25.4% in the unincorporated joint venture, Gassled, which owns the Norwegian sub-sea high-pressure 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 the Netherlands. The network operations and upgrade activity is undertaken by Gassco (not rated), which is 100% owned by the Norwegian government (Aaa stable).

RATINGS RATIONALE

Today's rating action reflects the fact that Solveig's debt service coverage ratios (DSCRs) will be negatively affected, following the confirmation on 26 June 2013 by the Norwegian Ministry for Petroleum and Energy ("MPE") of a significant reduction in tariffs on new bookings for the transmission of gas by Gassled. The rating action also reflects the substantial weakening of the previously supportive and predictable regulatory regime.

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 would have a material impact on Solveig's revenues from 2020 until the expiry of the licence.

Under the new tariff agreement, Moody's expects the K element to fall to less than 25% of the overall tariff from 2016. Prior to the MPE decision, the K element represented approximately 70% of the total tariff, decreasing to around 50% in the latter years of the licence.

Moody's expects that Solveig will continue to meet its debt service payments. However, the rating agency expects the company's DSCRs will start to fall from 2016, as new bookings attract the lower tariff. Moody's expects that Solveig's DSCR will fall to around 1.5x from 2016, from 2.0x currently.

Based on Moody's original debt amortisation assumption, the Rating Agency expects Solveig's DSCR to weaken considerably beyond 2020, when cash flows may not be sufficient to support debt service without the company drawing on liquidity reserves on occasion. This deterioration reflects an increasing proportion of new volume bookings from 2020 onwards, and is based on an assumed amortisation profile that does not take into account any change in capital structure that could take place upon the refinancing of the company's existing NOK4.9 billion (EUR660 million) term loan maturing in 2019. Moody's expects that if the assumed amortisation profile is amended through refinancing, the company would not need to draw on its liquidity reserves. However, Solveig's refinancing risk has increased substantially as a result of the tariff cuts.

The Baa2 rating reflects (1) Solveig's limited volume risk, with approximately 80% of volumes booked until 2020; (2) the company's ability to reprofile the debt amortisation, and the potential support of Solveig's shareholders in offsetting decreasing cash flows; (3) Solveig's initially strong debt service coverage until 2016; and (4) very strong downstream demand, supported by requirements for low-carbon generation in Europe, and (5) 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 now offers considerably less support to the transaction; (2) Solveig's currently aggressive financial structure, with a weak balance of debt interest relative to equity interests in the early years of the transaction; (3) the company's weak security package, which allows debtholders to assume ownership mainly in the form of rights over operating bank accounts, but not operating assets; (4) the complexity of repair works to Gassled's assets, given the size of the facilities and depth of the pipelines in certain areas; (5) the risk of trawler and anchor damage to the network, given its location, beneath one of the world's busiest shipping lanes; (6) untested debtholder rights of step-in to the cash flow of Gassled's assets in the event of the former's default or bankruptcy; (7) Solveig's exposure to declining gas production in the latter years of the licence, barring any new projects.

RATIONALE FOR NEGATIVE OUTLOOK

The negative rating outlook reflects Moody's expectation that Solveig's debt service coverage will start to worsen from 2016, even if the company's debt facilities are refinanced with a faster rate of amortisation. Moody's would expect to stabilise the rating in the event that (1) Solveig reforms its debt structure in a way that results in the DSCR for the transaction stabilising at around 1.4x, or above; and (2) any refinancing risk is removed from the structure.

WHAT COULD CHANGE THE RATING UP/DOWN

Given the negative outlook, 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, Moody's could upgrade the ratings. However, Moody's would be unlikely to upgrade the ratings back to their original level due to the rating agency's loss of confidence in the predictability of the regulatory regime for Gassled.

Conversely, absent a reversal of the tariff reductions, Moody's could downgrade the ratings in the event that the transaction is not restructured in a way that supports DSCRs at a level commensurate with the current ratings (i.e. at or above 1.4x) for the life of the transaction, and substantially removes any refinancing risk.

PRINCIPAL METHODOLOGY

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

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.

This rated entity or its agent(s) participated in the rating process. The rated entity or its agent(s) provided Moody's access to the books, records and other relevant internal documents of the 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.

Paul Lund
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 downgrades Solveig Gas Norway's senior secured debt ratings to Baa2 from A3; negative outlook
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