Moody’s joins S&P in warning of Gassled debt downgrade

The ratings agency is warning Allianz Capital Partners, the Canada Pension Plan Investment Board and the Abu Dhabi Investment Authority that forward-looking tariff cuts might lead to a downgrade of part of the consortium’s outstanding debt commitments.

Moody’s, the ratings agency, has joined competitor Standard & Poor’s (S&P) in warning about potential ratings downgrades for part of the debt taken out by a private investor consortium that bought into Gassled – the Norwegian gas transportation network – in 2011.

In a note published yesterday, the ratings agency warned that it might downgrade the A3 rating on some of the outstanding debt of Solveig Gas Norway – a consortium of Allianz Capital Partners, the Canada Pension Plan Investment Board and the Abu Dhabi Investment Authority – as well as the A3 rating attached to the team’s NOK12 billion (€1.6 billion; $2.2 billion) medium-term note programme, potentially make it costlier for the consortium to raise debt in the future.

Both downgrades could lower the ratings by more than one notch, Moody’s added.

At the heart of Moody’s warning is the previously reported announcement by Norway’s Ministry of Petroleum and Energy (MEP) that it might cut tariffs for future gas transportation contracts by 90 percent. The cuts would affect the so-called ‘K’ element of the tariff, which accounts for 70 percent of the total tariff during the beginning of the concession, lowering to 50 percent of the total tariff in later years.

The main problem for Solveig is that, while it has up to 80 percent of its total bookings covered by the current tariff regime up until 2019, over time, booked volumes under the present tariff regime will reduce to around 40 percent of total bookings by 2027. That means 60 percent of the consortium’s future bookings will fall under the new, reduced tariff regime.

While Moody’s forecasts that the consortium to be able to service its debt even if the MEP’s proposed cuts are fully implemented, it warns the company’s debt service coverage (DSCR) ratios will be significantly weakened. From May this year until 2020, Moody’s predicts DSCR to fall from 1.9x to about 1.6x. From 2020 onwards, though, DSCR could drop as low as 1.3x.

To make matters worse for the consortium, Moody’s DSCR projections are based on Solveig’s debt structure remaining as is. But there’s an important catch to that assumption, which Moody’s acknowledges: Solveig will have to refinance a NOK4.9 billion loan maturing in early 2019 and a significant tariff cut is likely to make that refinancing costlier, leaving the door open for a bigger impact on the consortium’s DSCR.

It is not yet known how all these potential changes might impact on returns to investors. In a November 2011 report, consultancy Deloitte estimated Gassled could yield a 7 percent pre-tax inflation-linked return. It added that, despite being a “high-yielding” investment, Gassled’s risk profile could “best be described as a Norwegian government bond”.

Gassled processes and transports 96 percent of the gas extracted from the Norwegian continental shelf, allowing it to be exported to the European Union, S&P said in an earlier report. It added that Gassled provides some 20 percent of the EU’s gas consumption and accounted for about 18 percent of its imports in 2010.

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

The MEP’s proposals for a tariff cut are under consultation, with a decision expected in May.