EIB-backed Castor loses investment grade

The Spanish gas storage’s €1.4bn secured bonds have been downgraded by Fitch to reflect an “increased probability of concession relinquishment”.

The long-term bonds issued by Watercraft Capital, the project company behind Spain’s Castor gas project, are losing the favour of credit rating agencies.

The securities, due to mature in December 2034, have been downgraded by Fitch from BBB+ to BB+, which in the agency’s terminology means they are no longer investment grade. With rival ratings provider Standard & Poor’s assigning a BBB to the bonds in March – with a negative outlook – the project is one notch away from fully entering junk territory (Moody’s doesn’t hold a rating for Watercraft).

Castor’s €1.4 billion secured bonds were the first to be backed by the European Investment Bank’s (EIB) Project Bonds Credit Enhancement initiative (PBCE), whereby the institution would enhance the credit rating of selected greenfield projects – by providing a subordinated debt facility – to make them more palatable to institutional investors.

The gas storage project, which is responsible for storing about 30 percent of Spain’s daily gas consumption, benefitted from a €200 million subordinated debt facility, as well as from €300 million worth of straight bond purchases by the EIB. The bonds were rated BBB by Standard & Poor’s and BBB+ by Fitch.

Even though the EIB’s initial ambition was to credit-enhance the bonds into A-rated territory, the institution had been happy with what it achieved upon their issuance, pointing out that Castor was rated one notch above Spain’s sovereign rating – the maximum securities can hope for under rating agency rules.

But last October a 4.2-magnitude earthquake halted work at the Gulf of Valencia-based facility, prompting Fitch to put the bonds on “Rating Watch Negative” (RWN), the first step towards a possible downgrade.

The agency now warns that the project company could hand back the concession to the state and claim termination payments before 30 November, when it is required to fully prepay the on-loan if the project has not become operational.

Meanwhile studies to determine the cause of the seismic activity, whose main purpose are to find out whether early gas injections played a part in the event, are ongoing and may not be conclusive for some time. This may further slow down the project’s progress and operations, Fitch said.

The agency underlined some positives: the availability of a €200 million cushion under the EIB’s PBCE would help fund compensation payments if they were to come due; and the government has reiterated the strategic importance of the asset in the Spanish gas system, hinting that some public support could potentially be provided to help bring the project to completion.

Yet Fitch stated that the ultimate fate of bondholders would still depend on the amount and timing of compensation payments as well as on the availability of support from Spanish developer ACS, the project company’s main shareholder.

The agency maintained the RWN in light of “continuing uncertainty on the project and possible further negative impact on the bonds”.