AFTER a long hiatus, project finance companies in Europe , the Middle East , and Africa (EMEA) are enjoying a revival of capital market issuance, as investors' hunger for infrastructure assets surges. That's according to a report published by Standard & Poor's Ratings Services (S&P) titled, "Investors' appetite for infrastructure assets boosts EMEA project finance." The report highlights how new transaction structures have been adopted now that tighter regulation in EMEA is curtailing traditional bank financing. "These competing structures serve to diversify the industry because capital market issuance is no longer reliant on a single funding structure," explains Standard & Poor's credit analyst, James Hoskins . "When project finance capital market issuance last peaked, in 2007, UK project finance companies were almost totally reliant on monoline guaranteed debt, and there was little issuance outside of the UK The only alternative to monoline guaranteed debt was secured bank lending," he adds. With these new methods of funding, we look to a more buoyant period for the industry and anticipate stable creditworthiness while this new wave of issuance unfolds, the S&P release says. What's more, the industry looks set to enjoy more diversification by way of further proposed transaction structures, such as the UK government's Guarantee Scheme and, in Italy , legislative changes to attract institutional investors. Since May last year, Standard & Poor has assigned a number of preliminary ratings to new projects that have construction risk. These are the first new project finance bonds with construction risk issued in EMEA since 2007, and demonstrate investors' returning appetite for infrastructure assets. It seems that social infrastructure, which includes assets such as with schools and hospitals will likely take center stage. That said, Ruwais Power Co's $800 million bond issuance signalled the return of the Middle Eastern market for project bonds. Last year also saw Watercraft Capital issue the first bond through the European Investment Bank's Project Bond Credit Enhancement initiative. "Of the 110 project finance issues that it rates, 75 per cent were investment grade on September. 30, 2013, compared with 80 per cent on March 31, 2013 . Since the end of the first quarter of 2013, the proportion of investment-grade rated issues in the portfolio has decreased by approximately 4 per cent. In the six months to September 30, 2013 , we added five new project finance companies to our rated portfolio. We also withdrew our rating on one entity at the issuer's request, following a default," says the release. OUTLOOK FOR 2014 Meanwhile, Standard & Poor's Ratings Services expects the oil and gas, midstream energy, and refining sectors to remain dynamic in 2014, with some clear winners and potential losers from a credit perspective. The global economic recovery has spurred energy demand growth, particularly in non-OECD countries; China is leading the pack, and India is close behind. Energy supply continues to increase as production from US shale formations, Canadian bitumen, and deepwater basins has helped offset politically induced disruptions and natural declines from mature assets elsewhere. New sources of production require new infrastructure, from pipelines and processing plants to offshore production platforms and liquefaction facilities, and we expect capital spending on energy infrastructure to remain high for the next few years. The effect of US oil and natural gas shale development on the global energy market continues to rise. US oil and natural gas imports have already dropped substantially, and the start-up of North American liquefied natural gas (LNG) exports should become a reality in the latter part of this decade. Although the glut of North American natural gas supply will, in our view, continue to keep US and Canadian natural gas prices at near break-even levels in 2014, we do not expect the increase in North American oil supply to affect oil prices to the same degree. As a result, Standard & Poor continues to view the credit profiles of global oil producers more favourably than those of their North American natural gas-focused peers. "We expect exploration and production (E&P) companies and major integrated oil companies to continue rebalancing their portfolios toward more profitable oil production and away from natural gas, while cheaply priced, mature natural gas assets continue to attract the attention of master limited partnerships (MLPs) and private-equity value hunters," it says. That dynamic could change dramatically, however, once the US and Canada begin exporting LNG, and market players are beginning to plan for this new reality. The potentially vast amounts of shale gas in North America could pose economic challenges for some of the large-scale LNG projects that have been proposed (but not yet sanctioned) during the past few years, as international natural gas buyers look to link their costs to a US benchmark natural gas price rather than to Brent crude. Despite the dynamic nature of the industry, we expect credit quality and ratings in general to remain relatively stable for 2014. Strong oil prices and growing oil production should enable most E&P companies to weather a multi-year period of weak natural gas and natural gas liquids (NGL) prices. Oilfield service demand growth on oil activity should begin to soak up the excess North American capacity in the sector, particularly in pressure pumping and fluid-handling services, while activity remains strong in the offshore deepwater and international markets. Midstream companies, although hurt by weak NGL prices, could benefit from infrastructure being built to handle new sources of production, although a key question will be how much debt these companies are incurring to fund capital investment. North American refiners that have access to discounted crude supplies should continue to outperform their global peers, but refining margins can quickly shift dramatically, the report says. MAJOR TRENDS Three trends in the oil and gas sector are stimulating long-term infrastructure investment for midstream energy companies: (1) increasing in-situ bitumen production in Canada , (2) the rising production from tight oil and shale plays like the Bakken in North Dakota , and (3) North American producers' focus on liquids-rich natural gas production. These are supporting a massive build out of oil and liquids pipelines, NGL gathering and extraction facilities, and the potential for North America to become a large-scale LNG exporter. Midstream companies that operate in those businesses are experiencing significant demand for new capacity, which is reflected in the large capital programs planned for the coming years. We believe these will likely hurt credit measures in the near term, forecasts S&P. The Canadian Association of Petroleum Producers is forecasting that in-situ bitumen production will increase by 1 mmbbls per day by 2020, more than doubling production from 2012. This is spurring producer commitments to additional pipeline capacity south, west, and east to reach global markets. Canadian midstream companies collectively are spending more than $25 billion to support this production growth. South of the border, growing production from unconventional oil plays is also driving the need for pipeline infrastructure, for example Enbridge's Sandpiper project to move Bakken crude east to its refining complex in PADD II. Increasing liquids-rich natural gas production in North America has spurred investment in new fractionation capacity at key pricing hubs (Mt Belvieu, Texas ; Edmonton, Alberta ) and pipelines to transport NGLs from new producing basins. Examples include Boardwalk Pipeline Partners' proposed Bluegrass pipeline to transport NGLs from the Marcellus and Utica shale plays to Gulf Coast hubs, and Enterprise Products' recent commissioning of another 85,000 bbs per day of capacity to its complex in Mt Belvieu. Finally, North America has the potential to be a major LNG exporter, with nearly 30 bcf per day of capacity spread over more than a dozen proposed projects in the US, and more than 9 bcf per day of capacity for five projects in Canada . Few projects have received the necessary regulatory approvals, and a final investment decision is still several years away, with in-service dates closer to the end of the decade. But the potential is there for multi-billion-dollar capital spending to launch this industry. US Gulf Coast projects can take advantage of the existing gas pipeline, storage, and power generation infrastructure in the region, which reduces overall capital costs. In Canada , the opposite is true. Large-scale LNG facilities will need significant infrastructure built because the locations are remote, lacking sufficient power and pipeline capacity. Several gas pipeline operators ( TransCanada PipeLines , Spectra Energy Corp ) have already been chosen should the projects go ahead. With major capital projects occurring across virtually all segments of midstream businesses, we foresee slightly increased risk to credit measures from the increased debt that could be required to support capital spending. Offsetting this is the fact that projects generally have high fee-for-service and/or contracted cash flows that will strengthen the companies' business risk profiles when the projects are complete. But in the meantime, we believe key credit measures will be pressured, particularly for companies that have more exposure to the big-ticket, long-haul crude/liquids or gas pipelines.
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