Earlier this year, ratings agency Standard & Poor’s (S&P) had warned it might downgrade the debt taken out by the private sector to buy into Gassled – Norway’s gas transportation network – and now it’s made good on that indication.
Last week, S&P downgraded over NOK8.7 billion (€1.1 billion; $1.5 billion) of Gassled private debt to BBB+ from A-, citing continuing uncertainty on the Norwegian government’s plans to cut tariffs for future gas transportation contracts by 90 percent. The government closed its consultation on the proposals in mid-March, but delayed implementation of any tariff changes from May 1 to July 1.
The new ratings are on negative watch.
S&P is downgrading two blocks of debt tied to different private sector consortia. The largest chunk – and the most exposed to any potential tariff changes from the Norwegian government – is the NOK4.9 billion in senior secured fixed-rate bonds maturing in December 2027 taken out by Solveig Gas Norway, a consortium comprising Allianz Capital Partners, the Canada Pension Plan Investment Board and the Abu Dhabi Investment Authority.
The downgrade also affects the consortium’s NOK12 billion euro [NOK and euro?] medium-term note programme and a US private placement. The main problem for Solveig is that it will have to refinance almost 50 percent of its outstanding senior debt in 2018-19, with “any significant tariff reduction […] materially [affecting] its prospects for a successful refinancing,” S&P argues.
Furthermore, the prospect of a renegotiation of the Gassled licences around 2020 would prompt a refinancing of the entire debt structure. The good news for Solveig is that, although it is highly geared at around 75 percent, it has strong annual debt service cover ratios (DSCRs), S&P points out.
For Njord Gas Infrastructure’s – a pairing of CDC Infrastructure and UBS Infrastructure Fund – circa NOK3.8 billion of senior secured index-linked bonds, due September 2027, the situation is a bit different. While it’s as exposed as Solveig to refinancing risk should a licence renegotiation occur around 2020, it faces no short-term refinancing.
Njord Gas is, however, geared to the tune of 80 percent, with relatively weak DSCRs of between 1.16x (minimum) and 1.66x (average), which makes the consortium particularly vulnerable to future capex demands. However, there is a dividend lock-up in place should DSCR fall below 1.20x.
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. S&P warns that if the government goes ahead with its planned 90 percent tariff cut, it could downgrade the debt further, “likely by more than one notch”.
Gassled processes and transports 96 percent of the gas extracted from the Norwegian continental shelf, allowing it to be exported to the European Union. 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.