OREANDA-NEWS. Fitch Ratings has affirmed the ratings of AquaSure Finance Pty Limited's (AquaSure Finance) AUD3.69bn senior secured debt at 'A-'. AquaSure Finance is the financing vehicle for Australia-based AquaSure Pty Limited (AquaSure).The Outlook is Stable.

The rating includes the bank debt issued by AquaSure Finance and the following bonds:

AUD150m Australian Medium Term Notes due 2020;
USD310m Series 2014A US Private Placement notes due 2024;
AUD100m Series 2014B US Private Placement notes due 2024;
USD450m Series 2015A US Private Placement notes due 2027; and
AUD152m Series 2015B US Private Placement notes due 2027.

The rating affirmation takes into account the stable cash flow provided by AquaSure's concession, which runs through to 2039, to design, build, operate and maintain a 150 gigalitre/year desalination plant and associated infrastructure near Melbourne, Victoria, under a public-private partnership.

KEY RATING DRIVERS
Robust Revenue Profile: AquaSure benefits from the State of Victoria's (the State) strong credit, from which it receives a monthly payment in return for operating and maintaining the project. AquaSure faces no price or volume demand risk since payments are received regardless of whether the State calls upon the plant to produce water or not. The project is not required to produce water in the current year ending 30 June 2016 due to the presence of adequate water levels in Melbourne-area reservoirs. The risk of revenue abatement, resulting from a failure to meet water production or other requirements, is effectively passed through to the third-party operator, subject to a cap. The project's Revenue Risk attribute is assessed as "Stronger".

Proven Technology: The plant uses a modular design based on proven technology, with 7.5% excess capacity above the highest potential water requirement. The facility was subjected to a number of tests, including a 30-day test at full output, which it comfortably passed. Separate energy performance testing demonstrated energy usage was significantly better than target levels. AquaSure holds a maintenance and repairs account that is sufficiently funded to meet the next 12 months of budgeted asset replacement costs.

Cost Pass Through: Under the project deed with the State, AquaSure is responsible for the operation and maintenance (O&M). AquaSure has however contracted with a joint venture of Degremont and Ventia Utility Services (the O&M JV) to perform the O&M, including asset replacement, under a set-price contract for the life of the concession. The O&M JV partners take on the risk of cost overruns, backed by joint and several guarantees from their parent companies (Suez Environnement and CIMIC Group), and security bonding. Electricity is provided by AGL Sales Pty Ltd under a fixed-price contract and guaranteed by AGL Energy Ltd, one of Australia's largest energy utilities. Overall, Cost Risk is assessed as "Midrange".

Refinancing Risk Well-Managed: The AUD3.69bn of senior debt is exposed to refinancing risk. However, the risk is partially mitigated through a broad spread of debt maturities, and a 50-50 sharing with the State of any losses due to higher refinancing margins. Base rate risk is passed entirely to the State, noting that base rates are currently fully hedged until 2020 at the State's request. The 2014 and 2015 issuances of bonds, along with the refinancing in October 2013 of the project's entire senior debt facilities in the bank market and a further AUD250m refinancing of bank facilities in February 2014, demonstrate AquaSure's adequate access to debt markets. The Debt Structure risk attribute is assessed as "Midrange".

Adequate Debt Service Metrics: The average debt service coverage ratio (DSCR) is 1.33 in Fitch's rating case, which factors in various stresses (among others no credit given to the cost pass-through provisions, increased refinancing margins, and revenue abatement with no pass-through). The all cost breakeven indicates that the project can incur a 60% increase in costs while maintaining an average 1.00x DSCR over the project life. These results are consistent with the 'A' category ratings as per the applicable criteria.

Peers: Compared to two other Fitch-rated availability projects - Meridian Hospital Company Plc ('BBB+'/Positive) and Derby Healthcare Plc ('BBB'/Stable) - AquaSure carries refinancing risk while the hospitals have fully amortising debt. However AquaSure is protected by the State assuming all base rate risk and a 50-50 sharing with the State of any refinancing losses due to higher than expected margins. AquaSure also benefits from stronger cost protections, due to full pass-through of O&M and lifecycle cost risks to strong counterparties, as well as a higher all-cost break-even ratio.

RATING SENSITIVITIES
A significant deterioration in the credit profile of the State, the parent guarantors of the O&M contractor, or the energy provider, could put pressure on the ratings of AquaSure Finance's bonds. They could also come under pressure should it experience difficulty in refinancing its debt in advance of maturities, or should its debt margins increase to a level that has a material adverse effect on debt service coverage ratios.

SUMMARY OF CREDIT
AquaSure designed, built, operates and maintains the 150 gigalitre/year Victorian Desalination Plant under a 30-year concession from the State of Victoria.