Castor bond rating hinges on Spanish authorities

Following a request to relinquish the Castor gas storage concession, the rating of €1.4bn of bonds depends on how the authorities respond to the request.

Fitch Ratings, the rating agency, says that bondholders’ agreement that the concession for the Castor gas storage concession in Spain should be relinquished was in line with its expectations.

In mid-July, the bondholders – accounting for €1.4 billion of senior secured fixed-rate debt due to mature in 2034 – approved the request by project company Escal UGS (comprising Spanish developer ACS, Canadian energy firm Dundee Energy and private investors) to hand over the concession to the Spanish authorities.

This move was seen as the most likely outcome, according to Fitch, and was already reflected in its downgraded rating of the bonds from BBB+ to BB+.

However, the relinquishment request has now passed to Spain’s Ministry of Industry, Energy and Tourism which is expected to rule on the request by 30 November 2014. If the request is approved, the Ministry would set out the terms of any compensation payment including its amount, the timing and the counterparty (or counterparties) responsible for payment.

If the payment from the previously untested compensation regime does not maintain the debt metrics or repay the bonds in full, then ACS would be required to make a partial pre-payment. A €200 million facility backing the project from the European Investment Bank’s Project Bond Credit Enhancement (PBCE) scheme would also be available to supplement the termination payments.

However, Fitch warns that failure by the authorities to approve the relinquishment and set out compensation terms before 30 November “may result in negative rating action”. This would increase exposure to ACS, as a sponsor support agreement would require ACS to repay the bonds in full by the next repayment date of 30 December 2014 (when €61 million of interest and principal is due). Fitch says it does not believe full repayment by ACS is likely.

Castor, an offshore gas storage reservoir in Spain which was developed by ACS, was expected to become operational this year. However, activities at the plant were suspended in October 2013 due to earthquakes in the project’s vicinity off the coast of Valencia.