Earthquakes halt landmark EIB-backed project

Work has been halted at a Spanish gas facility - the European Investment Bank’s first-ever project bond deal. Fitch is warning of a possible downgrade.

Castor, an offshore gas storage plant in Spain’s Gulf of Valencia, has been hit by a 4.2-magnitude earthquake following hundreds of minor tremors. Work at the facility, which was the subject of a pioneering European Investment Bank (EIB) project bond, has been stopped by the Spanish government.

At the end of July this year, the EIB announced that it had credit enhanced a €1.43 billion bond issue for Castor via an unfunded €200 million subordinated debt guarantee. It spent a further €300 million buying bonds.

The EIB commitment was the first credit enhancement initiative of its type and had been eagerly awaited. The initiative is in a pilot phase, but the EIB was hoping to do more deals of a similar nature.

Prior to the earthquakes, injections of gas had been made into the storage facility. Spain’s Industry Minister, Jose Manuel Soria, said there was no evidence that the injections had caused the earthquakes but it is believed that the tremors started at the same time as the injections. Scientists are now investigating the cause, with further planned injection activity suspended.

Fitch Ratings said it has placed the €1.4 billion of secured bonds (rated BBB+) on Rating Watch Negative (RWN) due to “significant uncertainty” – meaning the rating may be downgraded. Fitch said the project was “open to a variety of scenarios” ranging from short delays to the relinquishment or termination of the concession.

Fitch pointed out that the project company could hand back the concession to the state at any point in time and claim termination payments. However, these payments “lack precedent and are not sufficiently clear with respect to the actual payment mechanism and timing”.

Fitch added that the EIB’s €200 million credit enhancement facility could be made available to supplement the termination payments.

Cormac Murphy, head of the EIB’s project bond initiative, said at the time of the bond issue that it was especially popular with pension funds and insurance companies, which made up 61 percent of the investor base. They had been drawn to the long tenor of the bonds, which mature in 2034. German investors accounted for 28 percent of the issue.

The aim of the EIB initiative was to catapult credit enhanced bonds into A-rated territory, which would open them up to a critical mass of investors. Murphy said he was happy with a lower rating for Castor which was still “one notch above Spain’s sovereign rating”.

At the time of the Castor deal, the bank said it was looking at a further nine projects worth €1.4 billion of credit enhancement, including motorways in Slovakia, Germany, Belgium and the UK, grid connections and offshore wind farms in Germany and the UK, as well as more gas storage facilities in Spain and Italy.