February 6, 2017 / 8:15 PM / a year ago

Fitch Expects to Rate Stoneway Capital Corporation's $500MM Senior Secured Notes 'B'; Outlook Stable

(The following statement was released by the rating agency) SAO PAULO, February 06 (Fitch) Fitch Ratings expects to rate Stoneway Capital Corporation's (Stoneway) $500 million senior secured notes 'B(EXP)' with a Stable Rating Outlook, subject to receipt of final documentation. Proceeds from the notes, together with $136.5 million in equity to be funded at closing, are expected to be used to pay engineering, procurement, construction and development costs of four power plants, land purchase and rental costs and provide the initial funding of the Interest During Construction (IDC) Account. A portion of $115 million out of the total equity is expected to be financed by the Sponsor through a borrowing under a credit facility from Siemens Financial Services, Inc. The expected rating reflects Stoneway's power purchase agreement (PPA) with sole off-taker CAMMESA, moderate operating risks established through fixed-priced operation and maintenance (O&M) and overhaul costs with an experienced counterparty, and the project's pre-completion status mitigated through a fixed-price Engineering, Procurement, Construction (EPC) agreement signed with Siemens Energy Inc. The project benefits from an adequate debt structure, with fixed interest rate, adequate covenants and reserves. While DSCR results are consistent with a higher rating category, the rating is ultimately capped by Fitch's view on the credit quality of the revenue stream derived through payments by CAMMESA as sole off-taker and Argentina's 'B' country ceiling. KEY RATING DRIVERS Low Complexity of Works; Fixed Price, Date Certain EPC Agreement [Completion Risk: Midrange]: The greenfield project benefits from individual full EPC turnkey-lump sum contracts with a strong-counterparty (Siemens) and other contractors on a joint and several basis. The simple-cycle technology nature of the oil & gas thermal plants is considered of low complexity and scale, with technology widely established. Contract terms and scope are adequate and encompass all needed activities, delivery date of Dec. 1, 2017 is challenging but achievable, liquidated damages (LDs) provisions and delivery dates are in line with PPA obligations, and funded contingencies are approximately 5% of EPC costs. Delay risks which lead to PPA termination (+180 days delayed) are viewed as very unlikely due to low complexity of works, contractor expertise, and adequate LDs. Experienced Operator and Defined Overhaul Costs [Operations Risk: Midrange]: All four plants benefit from O&M agreements and Long-Term Services Agreements (LTSA) with Siemens S.A. for the entire tenor of the debt. Plants benefit from a defined overhaul routine with fixed prices for up to 60,000 hours (Las Palmas/San Pedro plants) and 75,000 hours (Lujan/Matheu plants), which is consistent with the high dispatch scenario expected. Weaknesses of contract structure are the exposure to foreign exchange (FX) risk, as a major part of the O&M fixed fee is denominated in Argentine pesos (ARS), and LTSA for Las Palmas/San Pedro plants are defined in Swedish kronas (SEK), and expected to be hedged only after commercial operations date (COD). Nevertheless, project can withstand a very high increase on the overhaul routines in SEK of 171.6%, or an appreciation of ARS to the order of 400%. Supply Risk Embedded in the Offtake Agreement [Supply Risk: Midrange]: Both oil and gas will be fully supplied by CAMMESA, project's sole off-taker. As per the PPA, in case of any supply failure the project is not obligated to dispatch and still receives its fixed capacity payment. Weak Counterparty with Sufficient Capacity Payments [Revenue Risk: Weaker]: The project's sole off-taker is CAMMESA, the wholesale power market administrator in Argentina. CAMMESA is considered a counterparty of weak financial profile and is dependent on sovereign subsidies to honor commitments. Most of the project's revenues will come from fixed capacity payments that cover fixed costs and debt service. Project also benefits from a one year tail on its PPA. Adequate Debt Structure with Overhaul Provisions [Debt Structure: Stronger]: The fixed-rate debt is fully amortizing and senior ranking, and benefits from a six-month Debt Service Reserve Account (DSRA), which will be funded with cash generation, and a 1.40x DSCR distribution test. The debt structure includes an O&M Reserve Account, which accumulates overhaul provisions whenever project is dispatched and will be used to make scheduled major maintenance payments. Additional debt can only be issued with a rating confirmation after giving pro forma effect to such new debt. Low Leverage with Strong Credit Metrics: The project presents very low leverage, with the rating case, which considers a higher dispatch scenario, yielding Debt/EBITDA of 3.5x in 2018, the first full year of operations, and deleveraging to 2.6x in 2021. Rating case minimum and average DSCRs of 1.17x and 1.58x are consistent with higher ratings. In addition, the project also presents very strong breakevens: (i) 171.6% increase in overhaul linked to SEK, (ii) 375% increase on O&M costs linked to ARS and (iii) 370% increase on SG&A costs. Rating Constrained at Country Ceiling: Revenues are indexed to USD but received in ARS. The project is therefore exposed to transfer and convertibility risks. The rating is ultimately constrained by Argentina's 'B'country ceiling. Peers Analysis: The transaction's rating is capped by the credit quality of the off-taker and the country ceiling of Argentina. There are no other transactions in Fitch's Latin American portfolio with a similar profile. Criteria Variation: For this transaction, a criteria variation to the 'Rating Criteria for Infrastructure and Project Finance,' dated July 8, 2016, is being applied with respect to the section 'Contractor Rating and Credit Enhancement' in 'Appendix 1 - Completion Risk in Project Finance.' The criteria does not specify which Issuer Default Rating (IDR) should be used for the contractor rating in the case of important subsidiaries of strong global or regional multinational companies, with a solid reputation and widely recognized expertise in a certain sector or industry. The variation considers that when a regional or country subsidiary of a multinational corporation that meets the aforementioned conditions and is part of a strategic business line of such multinational company is a contractual counterparty of an EPC agreement, the IDR that will be used for the purposes of the completion risk analysis will be the one of the ultimate parent company. Siemens Energy Inc., counterparty of the EPC agreement, is the U.S.-based subsidiary of Siemens AG which consolidates the power and gas business unit for Siemens A.G. ('A'/Outlook Stable) for the Americas. The 'Americas' segment represents +30% of total Siemens A.G. consolidated revenues. The Power and Gas business line, of which Siemens Energy Inc. ultimately reports to, is the largest revenue contributor, with over EUR16 billion in sales in 2016. For purposes of the contractor IDR under the 'Contractor Rating and Credit Enhancement' section of the 'Rating Criteria for Infrastructure and Project Finance', this analysis considers Siemens A.G.'s 'A'/Outlook Stable IDR. RATING SENSITIVITIES Positive --An improvement in the credit quality of CAMMESA as sole off-taker to the revenue stream combined with an upgrade of Argentina's country ceiling could result in a positive rating action. Negative --Deterioration in the credit quality of CAMMESA as sole off-taker to the revenue stream and/or a downgrade of Argentina's country ceiling could result in negative rating action; --Significant delays in the completion schedule which could ultimately lead to the possibility of PPA cancellation could lead to a negative rating action; --Delays from CAMMESA on the PPA payments leading to a deterioration of the project's liquidity could lead to a negative rating action; --Although unlikely in the near term, significant appreciation of the argentine peso, leading to an increased share of contracted O&M expenses as a percentage of revenues, and consequently, deteriorating DSCRs The notes will be senior and secured by a first-priority security interest on all of existing and future tangible and intangible assets, including but not limited to all physical assets of the project, all inventory, machinery and equipment and all accounts, real estate rights under land agreements. TRANSACTION SUMMARY Stoneway is a private company constituted with the purpose of constructing, owning and operating four simple-cycle power-generating plants with a total installed capacity of 686.5 MW, through two indirect subsidiaries, Araucaria Energy S.A. (Araucaria) and SPI Energy S.A. (SPI). Stoneway thermal plants will be dual-fired and will utilize diesel & heavy fuel oil or natural gas to provide electricity to the wholesale electricity market in Argentina. Each of these plants benefits from 10-year PPAs with CAMMESA the Argentinean entity in charge of the management of the wholesale market and the dispatch of electricity into the country's power grid. PPAs are USD-denominated and have a fixed price based on contracted capacity and a variable charge; the majority of project's revenues are anticipated to be derived from fixed capacity payments. Under the terms of the PPAs, plants are required to achieve COD by Dec. 1, 2017. If COD is not attained within 180 days of Dec. 1, 2017, the PPAs shall be automatically terminated without the need of any notice whatsoever and without the right of any claim of any kind. Maximum delay penalties as per PPA are fully covered by a performance bond placed by the sponsor at auction bid. Two out of the four plants will be constructed by a consortium comprised of Siemens Energy, Inc., Siemens S.A. and affiliates of Duro Felguera S.A.; the other two plants will constructed by a consortium comprised of Siemens Energy, Inc., Siemens S.A., SoEnergy International Inc. and SoEnergy Argentina S.A. Each plant has individual EPCs on a turn-key basis. Stoneway has also engaged individual O&M Contracts with Siemens S.A. to perform the services necessary for the proper O&M of the plants, and long-term maintenance contracts with Siemens Energy, Inc. and Siemens Industrial Turbomachinery AB, for the annual inspections and overhaul routines of the engines. All contracts cover the tenor of the debt. Financial Analysis Fitch's base case incorporates COD on Dec. 1, 2017 and a 50% dispatch scenario throughout the life of debt. O&M and LTSA costs were considered as per the signed agreements, with the inclusion of the 'Program Initiation' and 'Mobilization' upfront fees (USD 14.07 million), funded through the permitted working capital facility of the project. O&M fixed prices denominated in ARS were escalated 5.95% in 2018 and 5% onwards. An excess fuel consumption penalty in excess of PPA heat rate of 2.5% and an unscheduled maintenance downtime penalty of 5% due to unavailability were considered. A 5% stress was also applied over administrative and insurance costs. Fitch's base case scenario resulted in average and minimum DSCRs of 1.56x and 1.31x, respectively. Debt/EBITDA is 3.3x in 2018, first year of full operations, and 2.5x in 2021. Fitch's rating case also incorporates COD on Dec. 1, 2017 and a 67% dispatch scenario throughout the life of debt. O&M and LTSA costs were considered as per the signed agreements, with the inclusion of the 'Program Initiation' and 'Mobilization' upfront fees (USD 14.07 million), funded through the permitted working capital facility of the project. O&M fixed prices denominated in ARS were escalated 5.95% in 2018 and 5% onwards, and overhaul routines denominated in SEK were stressed in 10%. An excess fuel consumption penalty in excess of PPA heat rate of 5% and an unscheduled maintenance downtime penalty of 7.5% due to unavailability were considered. A 10% stress was also applied over administrative and insurance costs. Fitch's rating case scenario resulted in average and minimum DSCRs of 1.58x and 1.17x, respectively. Debt/EBITDA is 3.5x in 2018, first year of full operations, and 2.6x in 2021. Additional scenarios were run to measure the cash flow's sensitivity to FX exposure and operational expenditures. A break even analysis indicates the structure is able to survive to (i) a 171.6% increase in overhaul routines denominated in SEK, (ii) a 375% increase on O&M fixed prices denominated in ARS and (iii) a 370% increase over administrative and insurance costs. A delay in COD scenario up to June 2018 yields DSCRs above 1.0x. Contact: Primary Analyst Bruno Pahl Director Fitch Ratings Brasil Ltda. +55-11-4504-2204 Alameda Santos, 700 - 7th floor - Cerqueira Cesar Sao Paulo - SP - CEP: 01418-100 Secondary Analyst Ryan Cunningham Director +1-646-582-4723 Committee Chairperson Bernardo Costa Senior Director +55-11-4504-2204 Media Relations: Elizabeth Fogerty, New York, Tel: +1 (212) 908 0526, Email: elizabeth.fogerty@fitchratings.com. 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