European Infrastructure Finance Yearbook - Investing In Bonds ...

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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. <strong>In</strong> 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. <strong>In</strong> 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.
What leverage levels and debt service coverage ratios are required to ensure an investment-grade rating for LNG shipping projects? There are simply no magic numbers for debt service coverage ratios or leverage levels that would guarantee an investment-grade rating. Ultimately the financial risk that a project or entity can absorb is derived from the underlying project risks, structure of financing, liquidity, and other factors. As a starting point, the financial ratios are a result of the underlying risk analysis. One typical element of LNG ship financing is a refinance risk that is often incurred, despite contracts backing the transaction far beyond the anticipated refinancing or initial maturity date. Although we consider this a weakness, it can, nevertheless, be somewhat mitigated through a refinancing strategy as well as incentives to start looking early at refinancing (such as margin or coupon step-ups and cash sweeps). The most important mitigating factor is, however, the sale and purchase agreements that will support the transaction far beyond the refinancing date and provide comfort to the financial markets that the entity will generate sufficient cash to repay the new debt. ■ STANDARD & POOR’S EUROPEAN INFRASTRUCTURE FINANCE YEARBOOK PROJECT FINANCE/PUBLIC-PRIVATE PARTNERSHIPS NOVEMBER 2007 ■ 125
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CONTENTS Introduction STANDARD & PO
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INTRODUCTION 2007: New Challenges A
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COMMENTARY Publication Date: Sept.
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UTILITIES EUROPEAN UTILITIES Once a
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