Further downgrades as Norway cuts Gassled tariffs

CDC Infrastructure and UBS Infrastructure Fund got their debt downgraded to junk as Norway pushes harsh gas tariff cuts through.

Norway has pushed through with its plan to cut tariffs for future gas transportation contracts by 90 percent starting in 2016, triggering a wave of downgrades for the debt taken out by the private sector to buy into Gassled, the country’s gas transportation network.

Ratings agency Standard & Poor’s (S&P) in a pair of notes yesterday cut the ratings for over NOK8.7 billion (€1.1 billion; $1.5 billion) of Gassled private deb. 

The most egregious cut affected some NOK3.79 billion taken out by Njord Gas Infrastructure – a consortium of CDC Infrastructure and UBS Infrastructure – reducing the rating on the senior secured index-linked bonds to BB from BBB+. A BB-rated debt instrument is commonly known as a 'junk bond'.

S&P said the tariff cuts would weaken the minimum and annual debt service coverage ratios over the remaining life of Njord Gas Infrastructure’s debt to 0.84x and 1.23x respectively, down from 1.23x and 1.46x at financial close.

According to the ratings agency, that will force the consortium to be “reliant on cash retentions ahead of the periods of low debt service coverage to fulfil scheduled debt service”. This will, in turn, require “shareholder support through the receipt of lower distributions,” S&P added.

Still, S&P was optimistic that, in the event of a default, bondholders could expect to get back between 90 percent and 100 percent of their money.

Solveig Gas Norway – a consortium comprising Allianz Capital Partners, the Canada Pension Plan Investment Board and the Abu Dhabi Investment Authority – saw the ratings on NOK4.87 billion of senior secured fixed-rate bonds and NOK12 billion euro medium-term note programme cut to BBB- from BBB+.

In Solveig’s case, S&P’s is more concerned about the consortium’s refinancing prospects, since it has to refinance almost 50 percent of its outstanding senior debt by early 2019. “We have assumed that Solveig successfully completes this exercise, but at a higher funding cost than the existing facility,” S&P stated, adding that a successful refinancing would “be of strong support to the ratings”.

On the other hand, should Solveig face onerous refinancing conditions or is having difficulty refinancing before its scheduled date, the ratings agency might downgrade its debt further.

While both consortia have most of their short-to-medium-term bookings covered by the present tariff regime, over time, the majority of bookings will fall under the Norwegian government’s new tariff framework.

Gassled processes and transports 96 percent of the gas extracted from the Norwegian continental shelf, allowing it to be exported to the European Union (EU). It provides some 20 percent of the EU’s gas consumption and accounted for about 18 percent of its imports in 2010. 

In a 2011 report, Deloitte estimated the private sector – including other investors not present in the above consortia – had spent around $5 billion buying into Gassled over the last few years, valuing the gas monopoly at $12.5 billion.