European Infrastructure Finance Yearbook - Investing In Bonds ...

PROJECT FINANCE/PUBLIC-PRIVATE PARTNERSHIPS
124 ■ NOVEMBER 2007
government’s financial position would be
materially harmed if the shipping entity were to
default. Government ownership of a shipping
company and direct financial support mechanisms
are also ways to link the rating on a shipping
project more closely to that of the sovereign.
As with project finance analysis, sovereign and
institutional risks are assessed as well as
credit enhancements.
Could LNG ships have a rating above the
underlying project rating?
Typically the creditworthiness of the underlying
LNG supply project will constrain the rating of
the shipping deal. The two are inextricably linked
in the value chain because the ships rely on the
project to produce the LNG and the project is
paying the charter fees. It might be possible,
however, for the LNG shipping project to achieve
a rating above that on the supply project if some
delinkage is achieved from the underlying supply
project. In this situation, we require comfort that
the ships could earn sufficiently robust cash flow
without the supply project, through either
redeployment by obtaining long-term contracts or
through the spot market. In this case, our charterhire
price assumptions would be very conservative
given the likely long-term nature of the debt. This
situation might be more realistic in the long term
than in the short-to-medium term, assuming that
in the long term a deeper spot market develops.
The current high amount of ships contracted for
LNG projects, the lack of a deep LNG spot
market, and the expectation that older-generation
LNG ships might also be available for the spot
market once their charter agreements end, all
render unlikely the potential redeployment of the
vessels at rates commensurate with servicing of
debt under severely stressed scenarios.
What recovery potential would you ascribe to
LNG ships?
Although we have not issued any public recovery
ratings on LNG ship projects and continue to
refine appropriate recovery scenarios, our analysis
of recovery potential for LNG ship financings is
likely to include an assessment of the
redeployment of LNG vessels after a project
default in a similar way to the process described
above under a delinking approach. Given the
STANDARD & POOR’S EUROPEAN INFRASTRUCTURE FINANCE YEARBOOK
absence of any material sale and purchase market
for LNG vessels, we would not typically ascribe
much value to an enterprise value approach (such
as using EBITDA multiples or net present values)
when calculating our recovery ratings. Rather, we
would likely focus our recovery analysis on the
ability of the vessels to continue to service debt
under low charter-hire rate assumptions, which
could reflect historical lows witnessed in the spot
market or long-term charter market or future
lows anticipated in either market as appropriate.
Do you view LNG ship projects with more than
one vessel as less risky than single-ship deals?
All else being constant, the greater the number of
ships involved for a given financial profile, the
greater the potential for higher ratings. Adding
diversity can reduce operational risk as well as
exposure to force majeure risk by having a safety
cushion consisting of a residual operating fleet in
the event that specific problems occur with some
of the vessels. Although the LNG shipping
industry has a very favorable performance record,
the risk remains that some vessels might have
their payment streams affected due to technical
problems, political risk, or environmental
conditions. The technical risk issue is present
because LNG ships are becoming much larger to
improve economies of scale and are employing
reconfigured drive systems.
If we were to hypothetically compare a
standard single-ship project serving the same
underlying LNG project (with all other risks
remaining constant) with a multiple-ship project
serving the same underlying LNG project, the
chances are that rating would not be necessarily
enhanced by having more ships. There would
likely be more financial cushion at the same
rating category for the LNG ship project with a
higher number of vessels. The reason is that under
the two different scenarios the credit quality of
the same underlying LNG project continues to
provide a constraint on the rating on the LNG
shipping projects. Nevertheless, there could be
examples where a ship project, because of its
particular risk features, benefits by virtue of being
structured with a large number of vessels, and
therefore manages to achieve a rating above that
of the underlying LNG project rating.