Fitch Upgrades SBM Deep Panuke S.A.'s Senior Secured Notes to 'BBB-'; Outlook Negative
OREANDA-NEWS. Fitch Ratings has upgraded the rating of SBM Deep Panuke S.A.'s (Deep Panuke or the issuer) $450 million senior secured notes due 2021 to
'BBB-' from 'BB'. The Rating Outlook is Negative.
KEY RATING DRIVERS
Deep Panuke's rating reflects stable cash flow earned under a charter contract with fixed lease payments from Encana Corporation (Encana, rated 'BBB-' with a Negative Outlook by Fitch), whose rating actively constrains the project rating. The charter contains achievable performance requirements, a pass-through of all operational costs, and the lack of exposure to resource risk. The debt structure is fully amortizing with a relatively short tenor of seven years.
Revenue Risk: Midrange
Fixed Charter Contract: The charter contract with off-taker, Encana, insulates the project's cash flow from volume and price risk. The performance requirement linked to charter termination is not onerous and Fitch considers the possibility of performance-related termination remote. Fixed lease payments do not fluctuate based on the Deep Panuke production field center's (PFC or the project) operational performance, and revenue is not based on throughput.
Cost Risk: Midrange
Full Recovery of Life Cycle Costs: The PFC's operational complexity is mitigated by the involvement of parent SBM Offshore N.V. (SBM), which has extensive experience in offshore production, and by the full pass-through of all O&M and capital costs to Encana. The operations contract and useful life of the asset exceed the debt term, providing long-term operational stability.
Debt Structure: Midrange
Typical Debt Structure: Deep Panuke's debt structure includes conventional features. The senior secured notes are scheduled to fully amortize over a relatively short debt term and benefit from a six-month debt service reserve account (DSRA).
Stable Financial Profile: Fixed charter revenues align with level debt payments to create a flat debt service coverage ratio (DSCR) profile that should allow for consistent financial performance over the term of the notes. Fitch expects debt service coverage to average 1.26x, with a minimum of 1.26x.
SBM Credit Quality: Under the operating and charter contracts, bankruptcy or insolvency of SBM gives Encana the right to terminate these contracts without compensation to the project. Thus, a reduction in the credit quality of SBM increases the likelihood that the counterparty will acquire the termination option. As such, the project's rating is linked to the credit quality of SBM.
Peer Comparison: Deep Panuke is comparable to other availability-based projects with fixed revenue payments and cost pass-through provisions. SteelRiver Transmission Company LLC ('A-'/Stable Outlook) and Synagro-Baltimore LLC ('BBB+'/Stable Outlook) both benefit from stronger revenue counterparties and higher rating case coverage.
Positive/Negative - Counterparty Credit Quality: Deterioration or improvement in the credit quality of off-taker Encana or operator SBM could change the project rating.
Negative - Weak Operational Performance: Persistent weak operational performance may suggest a higher likelihood of charter contract termination.
SUMMARY OF CREDIT
Deep Panuke's upgrade reflects the rating of Encana, which was assigned at 'BBB-' with a Negative Outlook on March 14, 2016. As the key revenue counterparty, Encana's credit quality constrains the project rating. Any rating change in Encana's rating would lead to similar rating action for Deep Panuke.
The rating also reflects the strengthening credit quality of SBM, the sponsor and guarantor of the issuer's performance obligations under the charter. SBM's credit quality has improved due to a material reduction in leverage, the lifting of a ban on new business with its main client Petroleo Brasileiro S.A. (Petrobras, 'BB+'/Negative Outlook), and increased certainty of potential settlement amounts following an investigation of SBM and Petrobras.
Deep Panuke is the owner of the PFC deployed in the Deep Panuke natural gas field off the shores of Nova Scotia, Canada. The project consists of a natural gas production platform with a contracted production capacity of 300 million standard cubic feet per day, which has been in commercial operation since
Nov. 6, 2013. The project generates revenue pursuant to a charter-party contract with Encana for an initial term of eight years. Gas production and processing capacity is chartered exclusively to Encana. The PFC is responsible for accepting raw gas at the platform from all production wells, processing the gas to commercial quality and moving the processed gas to the export pipeline at the exit point of the platform. All other phases from exploration to delivery are Encana's responsibility.