Castor starts concession relinquishment consultations

The EIB-backed gas project is under the scrutiny of rating agencies, which fear untested compensation arrangements could put shareholders in a weaker position to service debt.

Watercraft, the project company behind Spain’s Castor gas storage project, is looking to obtain approval from liquidity providers for the relinquishment of its concession.

The request, submitted by Watercraft operating subsidiary Escal UGS, entitles the project company to compensation payments from the Spanish government, which the state could make through revenues derived from the gas system.

The process is subject to approval by the European Investment Bank (EIB), which backed the project through its Project Bond Credit Enhancement (PBCE) initiative last year. Eventually, it will also need the green light from other bondholders, which have on their books about €1.4 billion of senior secured fixed-rate debt due to mature in 2034.

The bonds have been put on credit watch with negative implications by Standard & Poor’s (S&P), which warned its rating could be downgraded by as much as two notches if risks currently weighting on the project’s shareholders’ ability to service debt materialise.

S&P says the payments of compensation could lead the state to increase tariffs for final users, a sensitive decision at a time when Spain has yet to fully recover from a fiscal and economic crisis. The agency sees the compensation arrangements as “untested” and wonders whether payments would be made in a timely manner, failing which Spanish developer ACS, majority shareholder in Escal UGS, would be left to do the heavy lifting of paying back bondholders.

Questions are also raised as to whether Castor will become operational or part of the gas system on time to generate cash for the state – which by contract needs to happen before the deadline of 30 November 2014 – as well as on the project’s leverage profile and the regulatory environment it would operate under.

The news comes little more than a week after Fitch downgraded Watercraft’s bonds in speculative territory to reflect what it saw as increased probability of concession relinquishment. The project is now rated BB+ by Fitch and BBB by S&P (Moody’s doesn’t rate the project).

On the plus side, both agencies underline the strategic importance of the asset – seen by the government as “essential and urgent infrastructure” – as well as its strong revenue stability and predictability if included in the gas system. A technical and financial audit conducted by the authorities also confirmed that the project's investment cost of €1.46 billion remained reasonable.

Castor’s €1.4 billion secured bonds were the first to be backed by the PBCE, whereby the EIB aims to boost the credit rating of selected greenfield projects – by providing a subordinated debt facility – to make them more attractive to institutional investors.

But last October a 4.2-magnitude earthquake halted work at the Gulf of Valencia-based facility, raising questions about its ability to become operational before the autumn deadline. Studies to determine the cause of the earthquake then threatened to delay the project.

With a comprehensive audit now completed, one hurdle to restarting operations is deemed to have been cleared. But agencies caution that other milestones to achieve final commissioning remain pending.