infrastructure finance o utlook - wordpress.com · capital markets hold key for clean energy ......

Capital Markets Hold Key For Clean EnergyFinancing, Outlines S&P at Rio+20 Forum

The issuance of “green bonds” may pave the way for increased private in-vestment, but investors must be aware of exactly what the risks are

With climate change increasingly recog-nised as a social and economic challenge,the need for significant public and privateinvestment in the renewable energy sectorwas a hot topic at the Rio+20 corporatesustainability forum. The event, which tookplace 20 years after the landmark 1992Earth Summit in Rio de Janeiro, saw worldleaders – along with participants from theprivate sector, NGOs and other groups –come together to discuss how to build aneconomy around the principles of sustain-able development.

“Given the huge, and indeed increasing,financing requirements of the renewableenergy sector, it is clear that funding mustgo beyond that provided by traditionalsources such as utilities and financial insti-tutions,” said Regina Nunes, Head of Southand Latin America for Standard & Poor’sRatings, at a panel debate at the Rio+20Corporate Sustainability Forum. “Meetingfinancing targets requires an unprece-dented level of investment, and successwill rely heavily on attracting an increasingnumber of other investor pools – includingprivate equity, pension funds and thecapital markets.”

The panel - made up of leading figuresfrom the banking, insurance, and politicalworlds - agreed that the need for private in-vestment in renewables will become signifi-cant as the impact of the Basel III andSolvency II regulations increases in thenext three to five years. Basel III, forinstance, will increase the capital charge forbanks holding long-duration loans and thusprovide an incentive to rotate capital.Combined with the trend of bank down-grades this could reduce the amounts andincrease the costs of long-term banklending. For instance, S&P estimates thateurozone corporate borrowers could seeannual additional interest costs of almostUS$50 billion under Basel III (assuming abank return on equity target of 10%). Thepanel suggested that meeting the globalclean energy challenge therefore requiresextensive collaboration between banks,insurance companies, energy utilities andgovernments.

Nunes stressed: “Renewable energyprojects have often been considered highrisk given their reliance on government

support and relative immaturity, accentu-ated by the difficulty in measuring theirrevenue streams in comparison with otherinvestments. Our role as a ratings agency isto be completely transparent about whatthe risks are, and to provide insight onstructures that may facilitate financing inthese areas.”

“Indeed, to date, the ability of institu-tional investors, pension funds and thecapital markets to access clean energy in-vestments has been somewhat limited,given the small secondary debt marketsand the absence of large volumes of liquid,investment-grade securities.”

In this respect, there is hope that long-term renewable energy fixed income debtsecurities, otherwise known as “greenbonds”, may spark some interest. Indeed,the green bond market has seen its initialUS$17million worth of issuance snappedup by the market – especially by institu-tional investors and pension funds keen tocomply with their corporate social respon-sibility mandates. The majority of thesebonds have been issued by multi-lateralagencies or banks and have, as such,mostly come with AAA ratings. While theinitial interest is promising, it is not enoughgiven the incremental financing require-ments of the sector – which according tothe IEA amounts to approximately US$1trillion per year globally until 2030.

Nunes believes that such financing struc-tures may provide the answer to the cleanenergy financing challenge. “Investors areincreasingly looking for fixed income in-struments that provide yield without goingtoo far down the credit curve. It is verymuch a trade off between risk and yield,and while previously they may have lookedfor bonds rated ‘BBB’, there is a sense that‘A’ rated investments are now becoming thenew minimum standard required,” sheexplained. “Sometimes private or publiccredit enhancement is needed to createproject-backed bonds with an ‘A’ rating,although they can also achieve this fromthe outset if well-structured, less leveragedand with better support mechanisms fromkey project counterparties.”

“Meeting financingtargets requires an un-precedented level of in-vestment...”

Further information is available on the Global creditPortal in the News piece entitled: “capital market in-volvement holds key for clean energy financing,outlines Standard & Poor’s at rio+20 forum”

Infrastructure Happenings

2nd July 2012, LondonEversheds Climate FinanceSeminarMichael Wilkins speaking

13th July 2012, LondonOffshore Wind BreakfastMichael Wilkins speaking

12th September 2012, London14th Annual REFF RenewableEnergy Finance ForumMichael Wilkins speaking

Please contact Sonia Bassi [email protected] forinformation on all Standard & Poor’sevents

OUTLOOKINFrASTrUcTUre FINANce

01-03 News & UpdatesSevern Trent Water ‘BBB+/A-2’

Intergen N.V outlook ‘negative’; TransgazMedias on creditwatch negative; PublicPower Corp downgraded to ‘CC’; KazTrans-Gas upgraded to ‘BB+’; Teollisuden Voimaassigned ‘BBB/A-2’ rating

04-05 Abertis Downgraded to ‘BBB’

Sanef downgraded to ‘BBB’; SNAMAssigned ‘A-/A-2’ rating; Deutsche Postremoved from creditwatch negative; StenaAB downgraded to ‘BB’; Aeroporti di Romaupgraded to ‘BB+’

06-09Features:• EMEA Utilities Enjoy A Largely StableOutlook, But The Dangers of SovereignDistress Remain• Availability Payments Insulate EMEA In-frastructure Projects From EconomicHeadwinds

10-12Utility Market Watchbox

S&P Utility Ratings; 5 year ‘A’ utility bondprices across Europe; plus the latest utilityratings and market prices

JUNE 2012

S&P has revised its outlook on InterGenN.V to negative from stable. It affirmedthe company’s ‘BB-’ corporate creditrating . and its ‘BB-’ rating on the $1.745billion multicurrency senior secured termnotes (due June and December 2017) and$800 million ($409 million outstanding asof Dec. 31, 2011) senior secured termloan B facility. The recovery rating of ‘3’remained unchanged.

“The outlook change reflects our viewsof lower spark spreads in InterGen's majormarkets, which will further squeezemargins,” explains S&P Credit AnalystTheodore Dewitt, “It also reflects thecontract-renewal risk present in the nextone to two years.”

InterGen is an open-end portfolio ofbeneficial interests in 12 operating electric-ity generation assets and a compressionstation/pipeline with 6,312 net megawatts(MW) of capacity in five countries. Thecompany is jointly owned 50% each byChina Huaneng Group and OntarioTeachers' Pension Plan (OTPP).

Spark spreads have been going down inthe U.K., one of the primary markets forInterGen. The average baseload cleanspark spread in 2011 halved to about £4.40per megawatt-hour (MWh) against about£7.07/MWh in 2010 due to continuedeconomic weakness in the U.K. as well as asignificant (almost 33%) rise in natural gasprices, stemming from strong oil prices as

well as higher gas demand (due to reper-cussions of the Fukushima earthquake)while the power prices did not catch updue to ample available supply.

Forward clean spark spreads for summer2012 ended at £3.60/MWh and winter2012 at £1.10/MWh. While the currentforward spreads continue to decline,starting in second-quarter 2013, forecastprices are expected to be higher thanpresent levels as the U.K. implements acarbon tax(increasing the cost of coal gen-eration), which will reduce supply due toplant retirements required under the LargeCombustion Plant Directive (LCPD).

Shrinking spreads were also present inthe Netherlands, where the 2011 average baseload clean spark spread went to about€2.09/MWh against €5.55/MWh in 2010 due to similar reasons as in the U.K..

Further information is available on the Global creditPortal in the research update entitled: “InterGen N.V.'sOutlook Is revised To Negative On Weak Power Prices;'BB-' ratings Affirmed”

Severn Trent Water’s ‘BBB+/A-2’ RatingsAffirmed On Proposed Shareholder Return

U.K.water and wastewater company has announced its intention to return£150 million to shareholders

S&P has affirmed its ‘BBB+’ long-term and‘A-2’ short-term corporate credit ratings onSevern Trent Water Ltd. (STW). Theoutlook is stable. At the same time, S&Paffirmed the ‘BBB-’ long-term and ‘A-3’short-term corporate credit ratings onSTW's holding company, Severn TrentPLC (SVT). The outlook on these ratings isalso stable.

The rating affirmations follow the prelim-inary announcement by Severn Trent (theconsolidated group, comprising STW andSVT), on May 30, 2012, of its annualresults for the year ending March 31, 2012.The results announcement, which wasbroadly in line with S&P’s expectations,included a statement that Severn Trent, viaSTW, was proposing a capital return toshareholders of £150 million. The capitalreturn will moderately weaken SevernTrent's consolidated debt coverage ratios,thereby eroding part of the ratingheadroom that currently exists. However,S&P anticipates that these ratios willremain comfortably in line with theirguidance at the current rating level.

“Since the beginning of the current regu-latory price control period [AMP5], whichstarted on April 1, 2010, Severn Trent hasbenefited from significant financial outper-formance,” comments S&P Credit AnalystMark Davidson. “This is due in particularto relatively high inflation and a low cost ofdebt. As a result, Severn Trent has built anincreasingly comfortable degree ofheadroom at the ‘BBB+’ level, with our ex-pectation that Standard & Poor's-adjustedfunds from operations (FFO) to debt wouldaverage about 11.5% per year until 2015.”

S&P believes that that adjusted FFO todebt and FFO interest coverage will remainabove 10% and 2.5x, respectively . Theadjusted debt-to-RCV ratio of the consoli-dated group is anticipated to remain rela-tively low for the rating, in the range of60%-65%.

Further information is available on the Global creditPortal in the research update entitled: “U.K. UtilitySevern Trent Water 'BBB+/A-2' ratings Affirmed OnProposed £150 Million Shareholder return; OutlookStable”

S&P sees the government of Romania, themajority owner of gas transmissionoperator S.N.T.G.N. Transgaz Medias,maintaining pressure on the company todistribute significant dividends beyondprevious forecast. Additionally, the regula-tory environment for gas transmission ac-tivities in Romania is becoming lesspredictable than previously assessed.

As a result, S&P placed its ‘BB+’ long-term foreign and local currency corporatecredit ratings on Transgaz S.A. Medias onCreditWatch with negative implications.

“The rating action reflects the likelihoodthat we will downgrade the company in thenear term,” says S&P Credit AnalystVittoria Ferraris. “This is because we seeincreasing pressure on Transgaz's business risk profile, which is currently still assessedas “fair”. This results from our mountinguncertainty regarding the supportivenessof the regulatory framework for gas trans-mission in Romania. We understand thatthe Romanian regulator was considering arevision of the existing tariff-settingmechanism to allow Transgaz to partiallyrecover revenues linked to gas volumes lostover the five-year regulatory period endingJune 2012.

“However, we understand that Transgaz'srecent discussions with the regulatorindicate worsened prospects of recovery.In our view, this is not consistent with ourprevious assessment of the visibility andpredictability of the regulatory environ-ment. We believe that the current situationand the regulator's untimely revisions toTransgaz's remuneration highlight key reg-ulatory risks in a jurisdiction where regula-tory determinations are not independentof the government.”

In addition, S&P sees a risk of negativeeffects on Transgaz's financial risk profilelinked to the Romanian government's ex-pectations of ongoing significant dividends.S&P previously understood that the 90%dividend distribution level was temporary -(the 90% payout applied to all Romanianstate-controlled companies).

Transgaz aims to offset the higherdividends by reducing its capital expendi-ture over the medium term. S&P views thisambition as challenging, considering thesignificant investments needed to upgradethe Romanian gas transmission network.As a result, S&P sees the risk of a materialdeterioration in Transgaz's historically solidcredit metrics over the longer term.

Further information is available on the Global creditPortal in the research update entitled: “romanianTransgaz Medias 'BB+' rating Placed On creditWatchNegative Owing To regulatory Uncertainty And HighDividends”

02 │ STANDARD & POOR’S RATINGS SERVICES │ InFraSTrUcTUre FInance oUTlooK JUne 2012

U.K. WATer UTILITy

Transgaz Medias‘BB+’ Rating PlacedOn CreditWatchNegative

Change made due to regulatory un-certainty and high dividends

rOMANIAN GAS TrANSMISSION OPerATOr

“Transgaz aims to offsetthe higher dividends byreducing its capital expenditure...”

InterGen N.V.'s Outlook Revised To Negative OnWeak Power Prices

The company’s performance has declined due to weak power prices in theU.K.. Despite this its ‘BB-’ rating was affirmed

U.K. BASeD eLecTrIcITy GeNerATOr

“Forecast prices areexpected to be higherthan present levels as theU.K. implements a carbontax...”

“Severn Trent hasbenefited from significant financial out-performance...”

The company’s three U.K. assets con-tributed about 51% to InterGen's top-linedistributions in 2011

JUne 2012 InFraSTrUcTUre FInance oUTlooK│ STANDARD & POOR’S RATINGS SERVICES │ 03

S&P has assigned its ‘BBB’ long-term and‘A-2’ short-term corporate credit ratings toFinland-based nonprofit electricitygenerator Teollisuuden Voima Oyj (TVO).The outlook is stable. S&P also assigned a‘BBB’ long-term issue rating to TVO's €2.5billion medium-term note program.

The ratings on TVO reflect S&P’s viewof the company's “strong” business riskprofile and “significant” financial riskprofile. The ratings primarily benefit fromthe company's protective business model,including a full cost cover structure backedby long-term off-take agreements with theowners. The ratings further benefit from thecompany's strong operational track record,its competitive production cost for existingplants, and liquidity sufficient to cover sig-nificant funding needs over the next fewyears.

“These strengths offset TVO's asset con-centration, risks attached to nuclear poweroperations, and the relatively weaker creditquality of some of the underlying share-holders, who are the ultimate off-takers ofoutput,” explains S&P Credit Analyst AlfStenqvist. “Furthermore, TVO has weakfinancial ratios, owing to its nonprofitstructure and high debt. It is also subject toproject risks, as evidenced by delays andcost overruns in relation to the ongoingconstruction of a new nuclear plant,Olkiluoto 3.”

The stable outlook reflects S&P’s expec-tation that TVO will continue to produceelectricity efficiently and at competitivecost for its shareholders under its cost-coverage structure, with a long-term pro-duction charge to shareholders well belowaverage electricity market prices. It furtherassumes that the company will keep anadequate liquidity position, including beingproactive in pre-financing upcomingfunding needs, which are significant due tothe completion of Olkiluoto 3.

Further information is available on the Global creditPortal in research update “Finnish Utility TeollisuudenVoima Assigned 'BBB/A-2' ratings; Outlook Stable.”

Teollisuuden VoimaAssigned ‘BBB/A-2’Ratings

Nonprofit electricity generatorbenefits from a protective full costcover structure

FINNISH eLecTrIcITy UTILITy

“TVo has weak financialratios, owing to itsnonprofit structure andhigh debt.”

“PPc's plummetingearnings under adverseoperating conditions arethe main reason behindits worsening liquidity...”

“our base-case scenarioprojects that KTG,despite planned invest-ments, will generateneutral free operatingcash flow in the mediumterm...”

PPC is vulnerable to strained operatingand funding conditions in Greece

S&P has raised its long-term corporatecredit ratings on Kazakh gas utilitycompany KazTransGas (KTG) and its100% owned gas pipeline operator JSCIntergas Central Asia (ICA) to ‘BB+’ from‘BB’. The outlook is stable.The rating onthe senior unsecured debt issued byIntergas Finance B.V. was raised to ‘BB+’from ‘BB’.

The upgrade reflects underlying im-provements in KTG's group stand-alonecredit profile (SACP), which S&P raised to‘bb’ from ‘bb-’ on the back of its expecta-tions of sound cash flow generation andmoderate projected debt levels for thegroup.

“Our base-case scenario projects thatKTG, despite planned investments, willgenerate neutral free operating cash flowin the medium term that should supportmaintenance of healthy credit ratios,”explains S&P Credit Analyst Sergei Gorin.“We also factor in our expectations thatKTG will maintain its prudent liquiditymanagement, based on an “adequate”liquidity profile and a long-term maturityprofile. We also expect the group's S&P-adjusted debt-to-EBITDA ratio to remainbelow 1.5x on a sustained basis.”

As S&P understands it, KTG mightreceive the status of National GasOperator in the near term, which couldboost group revenues and earnings. Thisstems from the associated preemptiverights to purchase gas from oil producersand then resell it in the market at higherprices. However, S&P expects the groupwill be obliged to spend the incrementalproceeds on upgrading and rehabilitatingits regional gas network.

The stable outlook reflects S&P’s viewthat the risks associated with plannedheavy capital expenditures, growingexposure to the more volatile gas retailsegment, and potential dividend pressurefrom the parent, KMG, are balanced bymoderate projected debt levels in themedium term, adequate liquidity andmaturity profiles, and improved profitabil-ity.

S&P assumes KTG will maintain both itsadequate liquidity and debt maturityprofiles on a sustained basis, to lessen refi-nancing risk on an ongoing basis.

Further information is available on the Global creditPortal in the research entitled: “Kazakh Gas UtilityKazTransGas And Gas Pipeline Operator Intergascentral Asia Upgraded To 'BB+' Outlook Stable”

Public Power Corp. S.A. Rating Lowered To ‘CC’

S&P believes that the Greek utility has almost fully depleted its liquidity, dueto sharply falling earnings and the absence of new credit facilities

The downgrade chiefly reflects S&P’s viewthat Public Power Corp. S.A.’s (PPC)liquidity, assessed as “weak”, has deterio-rated further in the past six months. S&Pbelieves the company has exhausted itsliquidity sources and that its ability tohonor its large financial obligations in 2012mostly depends on external factors in thecurrently highly uncertain environment inGreece (Hellenic Republic) (CC/Stable/C).

Consequently, S&P has lowered its long-term corporate credit rating on Greece-based utility PPC to ‘CC’ from ‘CCC’. Theoutlook is negative.

PPC faces debt service of nearly €1billion by the end of 2012, mostly withGreek banks, and of which about half isdue in June.

Based on first-quarter reported results,PPC's cash levels are minimal, and its totalcurrent liabilities exceeded total currentassets (excluding cash) by nearly €900million on March 30, 2012. Most of its debtmaturing with Greek banks in the firstquarter, totaling €650 million, wasextended, but only for a quarter.

“PPC's plummeting earnings underadverse operating conditions are the mainreason behind its worsening liquidity,” saysS&P Credit Analyst Nicolas Riviere.“Falling power demand, market share, poorweather that dragged hydropower to

historic lows, and rising fuel and power pur-chasing costs drove 2011 reportedEBITDA down 49%, compared with the2010 figure, despite sizable payroll reduc-tions. Still, PPC posted a 13% increase inyear-on-year revenues in first-quarter 2012,owing to market share gains, due to thesuspension of alternative suppliers' opera-tions, and tariff hikes. EBITDA continuedto fall in the quarter, however, losing nearly30%, because of PPC's power and fuelpurchases were further inflated by the inter-ruption in imports from Bulgaria.”

The Greek government decided inSeptember 2011 to collect a new annualproperty tax, amounting to €2.1 billion, byadding it to the electric bills of domesticpower suppliers. This move has accentu-ated the squeeze on PPC's liquidity. Deteri-orating economic conditions and thegovernment's relaxing of the threat to cutthe power of users who failed to pay thetax, has pushed up PPC's overdue receiv-ables, which peaked at €763 million at end-March for low voltage users.

The negative outlook reflects S&P’s viewthat PPC will likely default on its obliga-tions in the near term.

Further information is available on the Global creditPortal in research update “Greek Utility Public Powercorp. S.A. rating Lowered To 'cc' On Liquidity Squeeze;Outlook Negative”

GreeK POWer UTILITy

KazTransGas And Gas Pipeline OperatorIntergas Central Asia Upgraded To ‘BB+’

S&P predicts that the gas utility company and its core 100%-owned sub-sidiary will continue to generate sound cash flows over the medium term

KAzAKH GAS UTILITy

The rating actions follows S&P’sdowngrade of Sanef's controlling share-holder, Spanish infrastructure operatorAbertis Infraestructuras S.A. (Abertis;BBB/Watch Neg/--).

As a result, S&P has lowered its long-term corporate credit and issue ratings onFrench toll road operator Sanef to ‘BBB’from ‘BBB+’. The 'BBB/A-2' long- andshort-term corporate credit ratings andthe 'BBB' issue ratings remain on Credit-Watch with negative implications.

“The long-term corporate credit ratingon Sanef has been equalized with that onAbertis,” comments S&P Credit AnalystAurelie Hariton-Fardad. “The equalizationreflects our view that Abertis wouldprovide timely and sufficient extraordinarysupport to Sanef in the event of financialdistress.”

This support stems from Sanef'sstrategic importance for Abertis andSanef's large contribution, through inter-mediate holding company Holding d'In-frastructures de Transport S.A.S. (HIT; notrated), to Abertis' consolidated revenuesand cash flows. In 2011, Sanef's revenuesand EBITDA represented more than 38%of Abertis' revenues and EBITDA on afully consolidated basis, and about 25%on a proportionate basis.

Disregarding the expectation ofsupport from Abertis, S&P assess Sanef'sstand-alone credit profile (SACP) at ‘bbb-’.

The SACP reflects S&P’s view of Sanef's“excellent” business risk profile, temperedby its “aggressive” financial risk profile.The assessment of Sanef's financial riskprofile incorporates the leverage of itsparent company, HIT, because HIT relieson its sole asset, Sanef, to service its debt.

The CreditWatch negative placementprimarily reflects the ongoing risk thatS&P could lower its ratings on Sanef byone notch if a similar rating action istaken on Abertis. S&P therefore aims toresolve the CreditWatch placement onSanef at the same time as it resolves theCreditWatch placement on Abertis. Thepolicy is to resolve CreditWatch place-ments within 90 days, although S&P willattempt to resolve them sooner, ifpossible.

Further information is available on the Global creditPortal in the update entitled: “French Toll roadOperator Sanef Downgraded To 'BBB' FollowingDowngrade Of Parent Abertis; Still On creditWatchNegative.”

Abertis Downgraded To ‘BBB’ FollowingDownward Revision Of Business Risk Profile

Reassessment made in light of the volatility in traffic volumes experiencedby the company’s Spanish toll road network operators

S&P has lowered its long-term corporatecredit and senior unsecured debt ratings onSpain-based infrastructure operator AbertisInfraestructuras (Abertis) to ‘BBB’ from‘BBB+’. The ratings remain on Credit-Watch, on negative implications.

“The downgrade reflects the downwardrevision of our assessment of Abertis'business risk profile to “strong” from“excellent”,” explains S&P Credit AnalystAurelie Hariton-Fardad. “This factors in ourview on the high level of volatility in trafficvolumes on Abertis' Spanish toll roads.Average daily traffic declined by 24%between 2007 and 2011. We forecast that,in 2012, traffic on Abertis' Spanish tollroads will contract by a further 9%, with amilder decline in traffic volumes thefollowing year. We also attach a 40% prob-ability to a more pronounced recessiontaking place, which could result in greatercontraction in traffic in the near term.”

In S&P’s opinion, greater traffic volatilityon Abertis' Spanish toll roads has beendriven by the weak economic environmentin Spain, the country's high unemployment

rate, and adverse population trends. Inaddition, toll road operators in Spain facegreater competition from non-toll roadsthan their French and Italian counterparts.

At the consolidated group level, S&P an-ticipates that the decline in traffic volumesin Spain will be partially offset by the per-formance of Abertis' international tollroads, and that tariff increases and costsavings will continue to support earnings.However, the company is heavily reliant onits Spanish toll road operations to serviceits recourse debt. Over the past three years,about 80% of the dividends received by theparent company originated from Spanishtoll roads.

S&P aims to resolve the CreditWatchplacement on Abertis within 90 days,following a decision on the acquisition byAbertis of OHL's toll road operators inBrazil and Chile.

Further information is available on the Global creditPortal in the research update entitled: “Abertis In-fraestructuras Downgraded To 'BBB' FollowingDownward revision Of Business risk Profile; credit-Watch Negative”

S&P has assigned its ‘A-/A-2’ long- andshort-term corporate credit ratings toItaly's gas infrastructure operator SNAM.The outlook is negative.

“The ratings on SNAM reflect S&P’sview of the group's “excellent” businessrisk and “significant” financial risk profiles,as our criteria define these terms,” explainsS&P Credit Analyst Vittoria Ferraris.

The ‘A-’ long-term corporate creditrating on SNAM is based on its stand-alonecredit profile (SACP), which S&P assessesat ‘a-’, and S&P’s opinion that there is a“moderate” likelihood that Italy's lendinginstitution Cassa Depositi e Prestiti SpA(BBB+/Negative/A-2) would providetimely and sufficient extraordinary supportto SNAM in the event of financial distress.

SNAM's business risk profile issupported by the group's low-risk,regulated operations resulting in stableearnings and cash flows. The group alsobenefits from a degree of business diversifi-cation, which supports its profitability. Inparticular, S&P considers the Italian regula-tory framework for regulated gas opera-tions as credit supportive. The regulatedgas sector is overseen by a politically inde-pendent regulator that has a long record of ensuring SNAM's ability to earn a sufficienttotal return, as well as finance its opera-tions and expansion. S&P believes this is ofparticular importance in order to suffi-ciently insulate SNAM from the increasingfiscal pressure and more challengingfinancing conditions in Italy.

S&P’s assessment of a “significant”financial risk profile reflects the expectationthat SNAM will be able to maintainadjusted funds from operations (FFO)-to-debt metrics in the 13%-15% range over2012-2016. Under the base-case scenario,this should be supported by S&P’s expecta-tion of ongoing improvements of the regu-latory framework affecting, in particular, itstransmission operations from January2014. SNAM's relatively low exposure tovolume risk - in an environment where S&Panticipate a rapidly deteriorating demandfor gas in Italy over 2012-2016 - shouldalso support financial metrics in the above-mentioned range.

Further information is available on the Global creditPortal in the research summary entitled: “Italian GasUtility SNAM Assigned 'A-/A-2' ratings; OutlookNegative”


SPANISH INFrASTrUcTUre OPerATOr

SNAM Assigned ‘A-/A-2’ Ratings,Although Outlook IsNegativeItalian group benefits from generallylow-risk, regulated gas operations

ITALIAN GAS UTILITy

“In particular, S&Pconsiders the Italian reg-ulatory framework forregulated gas operationsas credit supportive.”

Sanef Downgraded To ‘BBB’ FollowingDowngrade Of Parent Abertis

S&P has equalized its long-term rating on Sanef with that on its parent,Abertis, reflecting the strategic importance of the company for Abertis

FreNcH TOLL rOAD OPerATOr

“In 2011, Sanef'srevenues and eBITDarepresented more than38% of abertis'revenues...”

“The company is heavilyreliant on its Spanish tollroad operations toservice its recoursedebt.”

Sanef operates the third-largest intercon-nected toll road network in France


S&P has raised its long-term corporatecredit rating on Italian airport operatorAeroporti di Roma (AdR) to ‘BB+’ from‘BB’. It also affirmed the short-term ratingon the company at ‘B’. At the same time,the ratings were removed from Credit-Watch. The outlook is positive.

S&P raised the rating because AdR hassuccessfully entered into a new €400million syndicated term loan, which shouldbe sufficient to repay Tranche A1 of thedebt held by its finance subsidiary RomulusFinance S.r.l., the balance of which is due inFebruary 2013. This eliminates the liquiditypressure that had been weighing on therating and has restored S&P’s assessmentof AdR's liquidity to “adequate” from “lessthan adequate”. As of March 31, 2012, thisfacility had a net balance of €424.6 million,adjusted for cash held in a restricted collat-eralization account.

The upgrade is also consistent with thecompany's improving credit metrics, with aratio of adjusted funds from operations(FFO) to debt of about 13% in 2011, upfrom about 10% in 2010. Under our base-case operating scenario, adjusted FFO todebt is expected to improve further tomore than 13% in 2012, even under S&P’sassumption of 0% passenger growth thisyear.

“This reflects the challenging economicenvironment in Italy and for AdR's main

airline carrier Alitalia (unrated) as well asharsh winter weather in the first quarter of 2012 that resulted in traffic declining by0.7% in January-April 2012 year-on-year,”explains S&P Credit Analyst IzabelaListowska. “Offsetting the weaker trafficenvironment, revenues will likely remainflat in 2012, due to an inflation adjuster.Furthermore, the company will maintainthe EBITDA margins in a range of 41%-43%, according to our base-case operatingscenario.”

Further information is available on the Global creditPortal in the transaction update “Italian AirportOperator Aeroporti di roma Upgraded To 'BB+' On refi-nancing And Improved Liquidity; Outlook Positive”

Aeroporti di RomaUpgraded To ‘BB+’On Refinancing

Italian airport operator has success-fully entered into a syndicate bankfacility to refinance its RomulusTranche A1 due February 2013

ITALIAN AIrPOrT OPerATOr

“offsetting the weakertraffic environment,revenues will likelyremain flat in 2012, dueto an inflation adjuster.”

“Deutsche Post's maildivision will stabilize itseBIT at a level of €1billion.”

“We think the weakratios can also beexplained by continuedweak profitability byStena's ferry opera-tions...”

Pressure on the ratings could arise if thegroup's credit ratios fail to improve in linewith S&P’s forecast for 2012

The downgrade reflects continued weakcredit ratings for Stena in 2011 and thefirst quarter of 2012. Consequently, S&Phas lowered its long-term corporate creditrating on Sweden-based conglomerateStena AB to ‘BB’ from ‘BB+’. The outlookis stable.

At the same time, the issue rating onStena's unsecured debt was lowered to‘BB’. The recovery rating on this debtremains unchanged at ‘4’, indicating ex-pectations of average (30%-50%)recovery in the event of payment default.

The downgrade occured because, inS&P’s view, Stena's credit metrics are in-consistent with a ‘BB+’ long-term creditrating. At year-end 2011, Stena's ratio offunds from operations (FFO) to debtstood at just below 11%, predominantlydue to the group's high debt level. S&Pforesees no major improvement in creditratios during 2012, and anticipatescontinued negative free operating cashflow (FOCF) in 2012.

This is predominantly explained bydelivery of the last drilling ship on orderin the second quarter of 2012. The year-end 2012 adjusted debt level is now antic-ipated to be about Swedish krona (SEK)

58 billion-SEK60 billion ($8.8-9.1 billion).On March 31, 2012, adjusted debt stoodat SEK56.6 billion.

“We think the weak ratios can also beexplained by continued weak profitabilityby Stena's ferry operations (Stena Line)and the crude oil shipping operations,”explains S&P Credit Analyst Per Karlsson.Stena Line continues to suffer from lowerfreight and passenger volumes and theshipping segment from weak freight dayrates.”

S&P continues to assess Stena'sfinancial risk profile as “aggressive”, dueto the weak ratios and the group's aggres-sive investment polices. Cash flowcoverage ratios are still lower than forother ‘BB’ rated industrial companies.However, S&P believes this is mitigated byStena's large exposure to real estate.While this exposure is very capital intenseand low yielding, it also generates verypredictable cash flows. The company andits rating also benefits from the group'slarge diversification.

Further information is available on the Global creditPortal in the research summary: “Sweden-Based StenaAB Downgraded To 'BB' On Weak credit ratios;Outlook Stable.”

Deutsche Post Removed From CreditWatch

Company removed from CreditWatch Negative following a reassessment ofits business and financial risk profiles in light of current trading conditions

The CreditWatch resolution follows S&P’sreview of Deutsche Post's business andfinancial risk profiles, taking into accountthe implications of state aid payments inS&P’s base-case credit scenario.

As a result of the review, S&P hasaffirmed its ‘BBB+’ long-term and ‘A-2’short-term corporate credit ratings onGerman postal service and integratedlogistics provider, Deutsche Post AG. At thesame time, S&P removed the ratings fromCreditWatch, where they had been placedwith negative implications, following anorder by the European Commission torepay between €500 million and €1 billionin payments that the Commission deemshave breached state aid rules. The outlookis stable.

“As a result of our review, we have alsorevised our assessment of the group'sbusiness risk profile to “satisfactory” fromthe weaker end of the “strong” category,”says S&P Credit Analyst Roneil Thadani.“This reflected our view of the additionalpressure on Deutsche Post arising from aweak economic environment, the ongoingstructural decline in the group's mailbusiness, and increased reliance on theexpress and logistics businesses goingforward.”

According to S&P’s base-case operatingscenario, Deutsche Post's mail division will

stabilize its EBIT at a level of €1 billion.However, S&P forecasts that over time thedivision's EBIT will decline from about40% of group EBIT at present to nearerone-third by 2014, reflecting the anticipa-tion of continued growth in EBIT in eachof Deutsche Post's DHL divisions. S&Pviews the mail division's earnings genera-tion as predictable, albeit in structuraldecline, and having the least cyclicalityamong all Deutsche Post divisions.

After considering the implications ofstate aid payments in its base-casescenario, S&P believes that Deutsche Post'sfinancial metrics will be at a level commen-surate with an “intermediate” financial riskprofile, with a ratio of funds from opera-tions (FFO) to debt of close to 35% byyear-end 2012.

The stable outlook reflects S&P’s viewthat Deutsche Post's operating perform-ance will benefit from ongoing cost-cuttinginitiatives and gradual market recovery.S&P factors in a moderate recovery fromthe latter part of 2012, which should alsohelp to boost Deutsche Post's financial riskprofile.

Further information is available on the Global creditPortal in research update “Deutsche Post 'BBB+/A-2'ratings removed From creditWatch Negative; OutlookStable”

GerMAN LOGISTIcS PrOVIDer

Weak Credit Ratios see Stena AB DowngradedTo ‘BB’

Sweden-based conglomerate Stena AB's credit ratios seen as too weak tosustain previous ‘BB+’ rating

SWeDISH cONGLOMerATe

(c) Deutsche Post DHl

Regulated utilities in Europe, the Middle East, andAfrica (EMEA) should stay relatively resilient tosovereign risks and forthcoming regulatory changes,in S&P's view. Our outlook for most of the 44operating companies we rate in this sector is stable

due to their broadly “excellent” business risk profiles. Nearly all theutilities' revenues come from regulated electricity and gas trans-mission or distribution networks, or regulated water and wastewater operations, where the regulation provides for relativelystable and predictable earnings.

However, these utilities are facing several hurdles over the nearterm, not least of which is the economic instability across Europeand the increasing risk of negative political intervention in theutilities' operations. In particular, electricity and gas transmissionsystem operators in countries on the periphery of the EuropeanEconomic and Monetary Union (EMU or eurozone) are at risk offurther downgrades in the next two years, mainly as a result ofrising country risk, sovereign-related stress, and increasing regula-tory uncertainty. Eight issuers currently have a negative outlook,mainly reflecting sovereign stress and the negative outlook on thesovereign credit rating.

Furthermore, many transmission system and distributionnetwork operators need to upgrade aging infrastructure over themedium term, as well as invest in new connections, in particular toconnect renewable power sources to the grid. This has necessi-tated a significant increase in capital expenditure (capex)programs over the past few years. A lack of easy access to equity,given that many of the rated utilities are state-owned, means thatutilities are likely to finance their investments with debt, whichcould weaken credit metrics over the medium term.

At the same time, the regulatory framework in the U.K. is on thebrink of the most fundamental reform since the privatization ofthe sector 20 years ago. We think it is too early to determine theeffect that the introduction of the new framework will have on ourratings of the regulated utility companies. However, any concomi-tant increase in business or financial risk could, in our view, haveimplications for our ratings. The Office of Gas and ElectricityMarkets (Ofgem) plans to publish its final proposals at the end ofthe year, at which point we will have a clearer view of the potentialimpact.

The regulated utilities include water companies, transmissionsystem operators (TSOs), and distribution network operators(DNOs). We refer to the TSOs and DNOs collectively as T&Ds.The median rating among the 44 operating companies that werate in the utilities sector is 'BBB+' (see chart 1), compared with'A-' two years ago. Of these 44 companies, 33 have a stableoutlook (see chart 2).

Business Risk Profiles In This Sector Are Generally“Excellent”The natural monopoly and regulated operations of a T&D orwater company generally - notwithstanding regional variations

between frameworks - fosters relatively stable and predictableearnings streams through the regulatory period of typically threeto five years. This relative stability and predictability underpins ourassessment of the majority of the regulated utilities' business riskprofiles as “excellent”. Of the 44 regulated utilities that we rate, weassess 29 as having “excellent” business risk profiles. In our view,this is one reason why regulated utilities continue withstand theeconomic turmoil in Europe better than their unregulated peershave.

Sovereign Financial Distress Puts Pressure On The RatingsOf Regulated Utilities On The Periphery Of The EurozoneSovereign risk and utilities' credit risk are highly correlated, in ourview, reflecting the importance of government regulation onoperating performance and, in some cases, close ownership tieswith the respective government.

Deteriorating market sentiment is mostly affecting the periph-eral European economies, although economic conditions in thecore European countries have also been deteriorating. In theeurozone periphery, a combination of high public debt burdens,weak economic growth, and a higher cost of debt financing hasplaced substantial pressure on sovereign states to revise theirbudgets to reduce deficits. It has also made it harder for them usethe capital markets to refinance debt maturities. As a number ofsovereigns still have negative outlooks, particularly on theperiphery of the eurozone, there is a risk of further negative ratingactions on regulated utilities in these countries in the mediumterm.

The majority of negative rating actions on utilities sinceNovember 2011 relate to similar actions on the related sovereign,in line with our criteria for rating government-related entities(GREs). While many utilities have international operations, theEuropean utilities we rate continue to rely on their domesticmarkets and are therefore good proxies for the overall health of agiven economy. Utilities are generally healthy cash flow genera-

“The majority ofnegative rating actionson utilities sincenovember 2011 relate tosimilar actions on therelated sovereign...”

eMeA UTILITIeS eNjOy A LArGeLy STABLeOUTLOOK, BUT THe DANGerS OF SOVereIGNDISTreSS reMAIN

Karin Erlander, Credit Analyst at S&P, argues that although EMEA utilities continue to provide stable andpredictable earnings, economic instability in the eurozone combined with an aging transmission and distribution infrastructure represent significant hurdles that will have to be overcome

FeATUre ArTIcLe


tors, and their credit profiles can suffer if sovereigns pursue ag-gressive policies to maximize revenues, such as imposing newtaxes or reducing system costs by lowering subsidies or freezingtariffs.

One way that cash-strapped governments try to reduce theirdebt burdens is to change the remuneration parameters in the reg-ulatory frameworks that stipulate utilities' allowed earnings. Forexample, our recent rating actions on certain Spanish utilitiesreflect the current regulatory uncertainty in Spain, which a weakregulator and a heavy politicized regulatory system have added to.

The Italian government has intervened to negative effect in theoperations of Italian electricity transmission operator Terna SpA(A-/Negative/A-2) by introducing an extraordinary, albeittemporary, “Robin Hood” tax on the group's operating profits.However, we consider that the regulatory tariff resets in Italy andPortugal from Jan. 1, 2012, are generally credit supportive andremove the near-term regulatory reset risk.

Other governmental measures to reduce debt include divestingstakes in the utilities they own. For example, State Grid Corp. ofChina (not rated) recently indicated that it would buy a 25% stakein Portuguese utility REN-Redes Energeticas Nacionais SGPS S.A.(REN; BB+/Negative/B). In a recent agreement with the Por-tuguese government, Oman Oil Marketing Co. SAOG (not rated)also agreed to buy a 15% stake in REN from the Portuguese gov-ernment. Our opinion is that the privatization of REN is positive asit ends a period of financial inflexibility under governmentownership and we believe that the new owners will provide sub-stantial financial support.

The Dutch state has announced that it is considering divesting aminority stake in electricity TSO TenneT (A-/Stable/A-1) and gastransport and infrastructure company N.V. Nederlandse Gasunie(AA-/Negative/A-1+). And the government of the Republic ofIreland (BBB+/Negative/A-2), recently announced its intention tosell off the generation and supply business of fully state-owned in-tegrated utility Bord Gais Eireann (BBB+/ Negative/A-2), theowner and operator of the gas T&D operations in Ireland.

We expect the risk of further government interventions and/orsell-outs to persist over medium term, but we consider such risk tobe event risk, which is difficult to fully factor into the ratingsbecause it is more unpredictable.

The U.K. Regulatory Framework Is Set For The Most Fun-damental Reform In 20 YearsWe note that the regulatory framework for electricity and gasT&Ds in the U.K. is subject to extensive consultation by theregulator. Ofgem is to implement a new regulatory frameworkcalled RIIO (revenue = incentives + innovation + outputs), whichwill apply to electricity and gas transmission and gas distributionnetworks from April 1, 2013, and to electricity distributionnetworks from April 1, 2015. This model, which forms part of theU.K. government's strategy to ensure a sustainable, low-carbonenergy sector, represents the most fundamental reform of energyregulation in the U.K. since the sector was privatized 20 years ago.

Right now, we believe it is too early to determine whether theRIIO model will affect our ratings on regulated U.K. electricity andgas utilities. We think that a number of proposals under the newmodel may have the potential to increase business or financialrisk. We expect the picture to become clearer as we speak to theutilities and Ofgem about their plans. Ofgem has stated that it aims

to publish its final proposals on RIIO for electricity transmissionand gas distribution in December this year.

However, Ofgem recently published initial proposals for the firsttransmission price control to reflect the new framework under theRIIO model for electricity TSOs SP Transmission Ltd. (SPT; A-/Stable/A-2) and Scottish Hydro-Electric Transmission Ltd.(SHET; A-/Stable/A-2). While we believe that the outcome ofOfgem's initial proposals is credit-neutral for SPT and SHET, wethink that the initial proposals signal Ofgem's approach in applyingthe new RIIO regulatory framework. They also contain valuableinsight into the regulatory determinations under consultation atpresent--that on U.K. gas distribution networks.

Material Investment Needs Have The Potential To WeakenCredit MetricsT&Ds across Europe continue to face significant investment re-quirements. A need to upgrade and enhance aging networks andgrids is one of the reasons for new investment. In addition, we un-derstand that T&Ds must invest to strengthen cross-border con-nections amid the ongoing integration of electricity and gasmarkets in Europe. At the same time, investments in renewablepower, as well as in conventional power stations, require funds toexpand networks and facilitate the connection of new powersources to grids.

The capital expenditure (capex) programs of the 12 largest gasand electricity TSOs in Europe have increased significantly inrecent years. However, investments gradually tail off toward theend of the forecast period in 2015, although they remain wellabove levels in 2006-2009.

Because the governments fully or partly own many of the T&Dswe rate, these utilities do not have easy access to equity funding.Consequently, we think they will mostly finance their investmentprograms with debt, which has the potential to increase interestburdens and weaken debt protection measures.

Regulation Provides Stability For U.K. Water Companies,But Ratings Headroom May Be Unsustainable Beyond TheCurrent Price Control PeriodThe 13 water and wastewater companies that we rate in Englandand Wales (including six corporate securitizations with issueratings only) are enjoying a period of stability. This is due to thepredictability of the current regulatory price control period (AssetManagement Period 5 [AMP5]), which is now in its second year.

The 13 companies form a fairly homogenous group, with a focuson the regulated water business in their service areas, where theyenjoy monopoly positions. At the same time, we assess thefinancial leverage across the water and waste water sector as rela-tively high, which weighs on the credit quality of companies in thissector. The similarity of business and financial risk profiles in thissector results in an aggregation of ratings in the 'BBB+' category,and all of the U.K.-based water and waste water companies have astable outlook.

However, although we have seen ratings headroom build incertain cases, we think this might not be sustainable over therating horizon of 2014-2015, when the current price controlperiod ends. This is because we believe that the water companieswill ramp up their capex programs to fund the improvement ofprivate sewers that the U.K. government transferred to the publicsewer network in October 2011.

This sector generally performed slightly above our projections inthe first year of the current regulatory period to March 31, 2011,particularly for leverage ratios. Lower-than-planned capex andhigh inflation supported this performance. High inflation generallybenefits regulated utilities, despite its negative effect on the cost ofdebt and operating costs, since revenues and regulated capitalvalue are linked to inflation.

Further information is available on the Global credit Portal in the industry reportcard entitled: “eMeA regulated Utilities enjoy A Largely Stable Outlook, But SomeFace Sovereign Distress”

“other governmentalmeasures to reduce debtinclude divesting stakesin the utilities they own.”

FeATUre ArTIcLe: eMeA UTILITIeS


Despite ongoing financial and political strains inEurope, the Middle East, and Africa (EMEA), thecredit quality of infrastructure projects in the regionremained relatively stable in the six months toMarch 31, 2012. What's more, Standard & Poor's

Ratings Services sees a pipeline of capital market-funded projects.These include a change in the ownership of parts of the Gasledgas transport system in Norway, along with various initiativesdesigned to restart financing in social infrastructure such asschools and hospitals. Notable developments in the period includethe ongoing discussions on the European Investment Bank's(EIB's) Project Bond Initiative, and the possible re-emergence ofthe monoline-insured financing model.

Positively, rated projects remain relatively well insulated fromthe weak economic conditions across much of the region due totheir largely availability-style payment regimes that removedemand risk from a project..

The Capital Markets Continue To Seek New ProjectFinancing SolutionsIn our view, a healthy pipeline of infrastructure projects is atpresent compromised by the lack of a financing platform toenable projects to access the capital markets. Specifically,investors fight shy of low investment-grade rated bonds inEuropean projects.

A number of initiatives are under way that aim to achieve 'A'category issue ratings for projects. However, these proposedsupport structures, such as the EIB's Project Bond Initiative, haveyet to result in the issue of rated bonds. We also understand thatthe U.K. government is investigating reforms to the private financeinitiative (PFI) project model to reduce costs, widen the availablesources of funding, and enhance flexibility, among other things.

There have been a small number of new project finance debtissues rated in the six-month period covered by this report. Theserelate to sales or refinancings, however, rather than funding fornew projects. For example, on Dec. 20, 2011, we assigned our'BBB-' debt rating to €1,583 million of bank facilities issued byFrench power transaction Exeltium S.A.S.

While our portfolio of rated projects in EMEA remains largelyinvestment grade, this is not true in other jurisdictions. In the U.S.,for example, there is a larger proportion of speculative-grade ratedprojects than in EMEA. However, we note that some projects thatwould traditionally be funded with bank finance have recentlyattracted capital markets funding. In early March 2012, forinstance, Northland Resources S.A. (not rated), a Sweden-basedstart-up iron ore mining project, issued about $350 million ofsenior secured bonds in U.S. dollar and Norwegian kronortranches.

Take-Up Of Middle East Projects Is LimitedIt's not only Europe that's struggling to secure project finance.The recent announcement of a deferral of the Hassayan IWPP

(independent water and power project) in Dubai suggests to usthat, despite the vast infrastructure funding needs in the region,difficulties remain in developing the IWPP model in Gulfcountries.

The refinancing of Barzan (a $10 billion gas plant project inQatar) and Dolphin (a $1 billion project for a pipeline betweenQatar and Abu Dhabi) were the most significant project financetransactions to close in the six months to March 31, 2012. Notably,the Barzan project was bank financed, whereas Dolphin chose torefinance using bonds. Capital market financing for large projectsin the Gulf region remains patchy, and is not the favored option ofissuers who are more familiar with bank debt. Additionally, a largearbitrage in pricing remains for certain key government-linkedissuers between bank and capital market finance. We think thisgap may close as bank financing becomes less readily availableover the longer term

Monoline Guarantees ResurfaceAlthough current project finance transactions in EMEA focusmore on economic than social infrastructure, there is activity inthe latter. On Dec. 22, 2011, Worcestershire Hospital SPC PLC(not rated) announced that it had replaced the original guaranteeprovided by Ambac Assurance U.K. Ltd. (not rated) with a newguarantee provided by Assured Guaranty (Europe) Ltd. (AA-/Stable/--) and Assured Guaranty Municipal Corp. (AA-/Stable/--). While all projects that have a monoline guarantee have a generalobligation to replace the guarantor when its rating falls belowspecified thresholds, Worcestershire Hospital is the first project todo so. To us, this demonstrates that there is some limited marketcapacity for insurance-wrapped debt.

New Criteria Assesses Project Counterparty Credit RiskThe use of contractors in project finance transactions can giverise to significant counterparty credit risk. On Dec. 20, 2011, aspart of the ongoing update of our global project finance criteria,we published new criteria on our methodology and assumptionsfor assessing counterparty risk associated with revenues, construc-tion, equipment supply, operations and maintenance, and rawmaterial supply contracts. We expect to publish a request forcomment on, and subsequently implement, the remainingelements of our revised project finance criteria over the course of2012.

The main elements of our revised counterparty criteria are toassess whether a contractor is replaceable and the costs to theproject company of effecting the replacement if required. If thecontractor is not replaceable, or if the project company has insuf-ficient liquidity to fund the replacement, then the rating on theproject debt could be capped by the counterparty's creditstanding.

While a number of soft facilities management (FM) contractorshave been successfully replaced in U.K private finance initiative(PFI) projects, there are few public examples of hard FM contrac-

“a healthy pipeline of in-frastructure projects is atpresent compromised bythe lack of a financingplatform to enableprojects to access thecapital markets.”

AVAILABILITy PAyMeNTS INSULATe eMeA INFrASTrUcTUre PrOjecTS FrOM ecONOMIcHeADWINDS

James Hoskins. Credit Analyst at S&P, sees the credit quality of infrastructure assets across EMEA continu-ing to hold steady, with the majority of projects rated at the investment-grade level

FeATUre ArTIcLe


tors or construction contractors being successfully replaced.(Hard FM contractors typically provide building maintenanceservices, while soft FM contractors generally provide cleaning andother services.)

However, on Dec. 19, 2011, The Coventry & Rugby Hospital Co.PLC announced that its hard FM contractor, Skanska FacilitiesServices (SFS) had been replaced by Vinci Facilities (VF) witheffect from Dec. 1, 2011. In accordance with standard contractterms, replacement costs were met in full by SFS. During the tran-sition, there was only limited service disruption. Moreover, VFoffered improved terms compared with SFS, thereby reducing thehard FM fee. As a result, the project company did not suffer anymaterial losses during the changeover and was, in fact, left in aslightly stronger financial position due to the reduced fee.

In our view, this demonstrates that, where there is a liquidmarket and relatively simple services, contractor replacement isachievable for both hard and soft FM services provided that theprocess is well managed.

Rating and Outlook DistributionOf the 91 issues in the sector to which we have assigned a rating,78% were investment grade on March. 31, 2012, (see chart 1),slightly increased from 77% on Sept. 30, 2011. Since the end ofthe third quarter of 2010, the proportion of investment-graderated issues in the portfolio has declined by approximately 17%. Atthe same time, the number of rated issues in this sector hasdipped to 91, from 93 in the previous six months.

This is the result of the new issue rating assigned to Exeltiumand the withdrawal of the ratings on Thor Asset Purchase(Cayman) Ltd. at Thor's request, ahead of a restructuring of thetransaction.

Disregarding the bond insurance provided by the monolineinsurers, the creditworthiness of projects reflected by theirStandard & Poor's underlying ratings (SPURs) on March 31, 2012,is predominantly investment grade (74%; see chart 2). This level issimilar to that recorded on Sept. 30, 2011. In our view, this clearlydemonstrates the continued high credit quality of our ratedportfolio of EMEA project finance assets, especially comparedwith other project finance markets such as the U.S.

In the six months ended March 31, 2012, we upgraded threeissues relating to three projects, compared with five upgradedissues related to two projects in the previous six months. During

the same period, there were eight downgrades affecting the debtissues of five projects, compared with nine downgrades affectingfive projects in the previous six months. In addition, two new issueratings were assigned and three withdrawn (see chart 3).

On March 31, 2012, 13 issues (about 14%) of the total long-term ratings retained a negative outlook, compared with 73% thatretained a stable outlook. This compares with 12% and 49%, re-spectively, on Sept 30, 2011. The significant increase in thenumber of stable outlooks over the period (see chart 4)relates tothe revision of the outlook on Assured Guarantee (Europe) Ltd. onNov. 30, 2011.

There has also been a slight increase in the number of SPURsthat retain a negative outlook since our last report. Fourteen issues(about 17%) retained a negative outlook on March 31, 2012,compared with 13 issues (about 16%) on Sept. 30, 2011. At thesame time, 55 issues (67%) retained a stable outlook on March 31,2012, compared with 51 issues (63%) on Sept. 30, 2011 (see chart5).

Further information is available on the Global credit Portal in the research commen-tary entitled: “Availability Payments Insulate eMeA Infrastructure Projects Fromeconomic Headwinds”

“We expect to publish arequest for comment on,and subsequentlyimplement, theremaining elements ofour revised projectfinance criteria over thecourse of 2012.”


FeATUre ArTIcLe: PrOjecT FINANce

Companies or Projects New Rating/Outlook OldRating/Outlook Rationale for change

Project Finance & Transportation creditsJune -12autovia del camino S.a. BBB-/negative BBB-/Stable Uncertain Financial Prospectscountryroute (a130) Plc BB-/Stable BB-/Stable Senior Debt recovery rate revised to ‘3’cMa cGM ccc+/cW neg B-/cW neg constrained liquidity Positionaeroporti di roma BB+/Positive BB/cW Dev refinancing and Improved liquiditySanef BBB/cW neg BBB+/cW neg Downgrade of abertisabertis Infrastructuras BBB/cW neg BBB+/cW neg Downward revision of BrPDeutsche Post BBB+/Stable/a-2 BBB+/cW neg/a-2 State aid Payments ordered by ecDublin airport authority BBB/negative/a-2 BBB/negative/a-3 Implementation of new criteriaUtilities credits

June -12

Teollisuuden Voima oyj BBB/Stable/a-2 not rated new ratingS.n.T.G.n. Transgaz S.a. Medias BB+/Watch neg BB+/Stable regulatory Uncertainty and High DividendsSnaM a-/negative/a-2 not rated new ratingPublic Power corp. S.a. cc/negative/- ccc/negative/- liquidity Squeeze

UTILITIeS rATINGS

STANDArD & POOr’S IFr rATINGS WATcHBOx

STANDArD & POOr’S UTILITy MArKeT WATcHBOx

STANDArD & POOr’S receNT UTILITy BOND ISSUe WATcHBOx

S&P LT 5yr CDS 1mth 3mth 2010-2012 S&P Market FCR Rating Borrower Country (bp) (D bp) (D bp) High Low Derived Signals*

a+/a-1/stable eDF S.a. France 147 -3 42 192 66 bbba-/a-2/neg rWe a.G. Germany 114 11 23 169 67 bbb+a/a-1/stable GDF Suez S.a. France 130 -1 38 190 56 bbb+BBB+/a-2/stable enel SPa Italy 453 94 230 473 105 bb-BB+/B/neg energias de Portugal S.a. Portugal 878 3 178 946 245 b-BBB+/a-2/stable Iberdrola S.a. Spain 472 108 252 486 116 bb-BBB-/a-3/stable United Utilities Plc UK 90 -2 14 133 70 aBB+/B/positive edison Spa Italy 146 -13 -6 349 107 bbba/Stable International Power UK 116 6 -11 171 74 a-

Source: Standard & Poor's, Bloomberg, 17 June 2012

Issue Date Issuer Country Issue Ratings (S&P) Currency Amount (m) Maturity Coupon (%)

10-May-2012 aguila 3 S.a. luxembourg B $ 130 13-01-2018 7.87522-May-2012 GDF Suez France a € 1000 6.03 2.2522-May-2012 GDF Suez France a € 1000 10.70 322-May-2012 GDF Suez France a € 1000 3.70 1.523-May-2012 Solveig Gas norway norway a- noK 4875 2027 n/a28-May-2012 northland resources Sweden B- noK 460 2017 13%28-May-2012 northland resources Sweden B- $ 270 2017 13%29-May-2012 natl Grid elect Trans UK a- £ 400 15.04 429-May-2012 Baa Funding ltd UK TBD £ 300 3,03 331-May-2012 aDP France a+ € 500 12.04 3.12531-May-2012 aDP France a+ € 300 7.03 2.37506-June-2012 aliiander nV The netherlands a+ € 400 12.03 2.87520-June-2012 Deutsche Bahn Finance B. Germany aa £ 400 2022 2.75

Source: Standard & Poor's, Bloomberg, 20 June 2012 * Fitch/M +IL=Index Linked


UTILITy MArKeT WATcHBOx


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Blaise GanguinManaging DirectorRegional Practice Leader EMEACorporate & Infrastructure [email protected]: (33) 1 4420 6698

Peter TuvingManaging DirectorLead Analytical ManagerCorporate & Infrastructure [email protected]: (46) 8 440 59 13

Michela BarilettiSenior DirectorAnalytical ManagerProject [email protected]: (44)20-7176 3804

Andreas KindahlSenior DirectorAnalytical [email protected]: (46) 8-440 5907

Stuart ClementsDirectorAnalytical ManagerTransportation/ Corporate [email protected]: (44) 20-7176 7012

Peter KernanManaging DirectorCorporate Criteria Officer [email protected]: (44) 20-7176 3618

Sandra PereiraDirector Client Business ManagementInfrastructure [email protected]: (44) 20-7176 3746

Claude ChaubetDirector Marketing and Investor RelationsInfrastructure [email protected]: (44) 20-7176 3689

Sonia BassiMarketing and Investor RelationsInfrastructure [email protected]:(44) 20-7176 3956

INFrASTrUcTUre FINANce OUTLOOK

Standard & Poor’s ratings Services20 canada SquareLondon, e14 5LHUnited Kingdom

www.standardandpoors.com

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