Research Update:

Watercraft Credit-Enhanced Project Bond For Spanish Gas Storage Refinancing Rated 'BBB Prelim'; Outlook Negative
Primary Credit Analyst: Jose R Abos, Madrid (34) 91-389-6951; jose.abos@standardandpoors.com Secondary Contacts: Michael Wilkins, London (44) 20-7176-3528; mike.wilkins@standardandpoors.com Michela Bariletti, London (44) 20-7176-3804; michela.bariletti@standardandpoors.com

Table Of Contents
Overview Rating Action Rationale Outlook Related Criteria And Research Ratings List

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Research Update:

Watercraft Credit-Enhanced Project Bond For Spanish Gas Storage Refinancing Rated 'BBB Prelim'; Outlook Negative
Overview
Newly-formed Luxembourg-based special-purpose vehicle Watercraft Capital S.A. (the issuer) is proposing to issue 1.43 billion senior secured bonds due December 2034 and on-lend the proceeds to Spain-based special-purpose vehicle Escal U.G.S. S.L. (ProjectCo), the concessionaire for the construction and operation of an underground gas storage and associated facilities off the northern Spanish Mediterranean coast. The proceeds of the on-loans will be used to refinance ProjectCo's outstanding loans--which financed the construction of the facility--to pay the cost associated with terminating the swaps currently in place, and to partially fund the debt service reserve account. We are assigning our 'BBB' preliminary issue rating to the bonds. The rating reflects, among other factors, the project's high revenue stability and predictability, and its strategic importance, as well as the transaction's highly leveraged financial profile, partially offset by the credit enhancement provided by a second-lien liquidity facility provided by the European Investment Bank to be used under stress scenarios. The negative outlook reflects that on the Kingdom of Spain, which currently constrains the proposed bonds' preliminary issue rating under our criteria.

Rating Action
On July 11, 2013, Standard & Poor's Ratings Services assigned its preliminary 'BBB' long-term issue rating to the proposed 1.43 billion senior secured fixed-rate bonds due December 2034 to be issued by newly established Luxembourg-based special purpose vehicle Watercraft Capital S.A. (the issuer). The outlook on the preliminary issue rating is negative. Final ratings will be issued on receipt and satisfactory review of all final transaction documentation, including revenue swap agreements. Accordingly, the preliminary ratings should not be construed as evidence of final ratings. If Standard & Poor's Ratings Services does not receive final documentation within a reasonable timeframe, or if documentation departs from materials reviewed, we reserve the right to withdraw or change the ratings.

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Research Update: Watercraft Credit-Enhanced Project Bond For Spanish Gas Storage Refinancing Rated 'BBB Prelim'; Outlook Negative

Rationale
Watercraft Capital S.A. will on-lend the proceeds of the proposed bond issue to Spain-based special-purpose vehicle Escal.UGS S.L. (ProjectCo). ProjectCo was granted a 30-year concession (extendable for two 10-year periods) by the Spanish government in 2008 for the redevelopment of a depleted oilfield reservoir originally exploited in the 1970s-1980s as a gas storage facility. By injecting and extracting gas into and from this geologically suitable reservoir, ProjectCo will serve to modulate and guarantee the supply to the Spanish gas system. The proceeds of the on-loans will be used to refinance ProjectCo's outstanding loans--which financed the construction of the facility--to pay the cost associated with terminating the swaps currently in place, and to partially fund the debt service reserve account. Our 'BBB' preliminary issue rating on the proposed bonds is one notch higher than our long-term sovereign credit rating on Spain based on our assessment that ProjectCo's ability to service its debt is superior to that of the sovereign. According to our criteria for rating an entity above the sovereign in the eurozone (European Economic and Monetary Union), we have assessed ProjectCo as having "high" exposure to domestic country risk. This assessment is based on the utility sector's "high" sensitivity to country risk and ProjectCo's asset and revenues base's full exposure to Spain. The preliminary issue ratings are supported by the following project strengths: High revenue stability and predictability, with revenues not exposed to demand or price risk: The project receives a regulated asset-based remuneration based on a "cost-plus" approach, which allows the full recovery of operating costs, investments, and a predetermined return on capital on the regulatory asset base, net of depreciation. The strategic importance of the asset, which has been officially recognized as an "essential and urgent infrastructure" asset by the Spanish government and the EU, although this support originated under more bullish gas demand forecasts for Spain. Construction completed on time and within budget. Milestones remaining for the official transfer of the asset by the granting authority are deemed simple by the lender's technical adviser, and should not involve any delays. Revenue counterparty risk is largely mitigated, in our view, because counterparties--all transport and distribution companies in the system--are entitled to fully recover the system's costs--including ProjectCo's remuneration--through collection of fees and tolls from end users. Default by any revenue counterparty would therefore translate into a higher cost passed through to each of the remaining counterparties' end users. Although the financing structure is highly leveraged, it is resilient to sensitivities on key financial and operational variables thanks to a second-lien secured letter of credit liquidity facility-the Project Bond Credit Enhancement (PBCE)--provided by the European Investment Bank

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Research Update: Watercraft Credit-Enhanced Project Bond For Spanish Gas Storage Refinancing Rated 'BBB Prelim'; Outlook Negative

(EIB). The PBCE's maximum available amount will be 200 million at issuance (covering around 14% of the senior bond) and will decrease as the bond amortizes, covering a maximum amount of 20% of the outstanding bond. This facility can be used under diverse stress scenarios. Once used, outstanding PBCE will rank junior to the rated bonds. In our view, this instrument considerably reduces the likelihood of default under most realistic stress scenarios, including moderately adverse regulatory changes. The preliminary issue rating reflects the following weaknesses, in our view: An uncertain regulatory environment due to rising fiscal and economic risks in Spain. We note that the industry regulator, Comisin Nacional de la Energa (CNE), is an independent body but does not have exclusive authority to determine network tariffs. Instead, the CNE is mainly consultative and final decisions are taken by the Ministry of Industry, Tourism, and Trade. Risk of potential revenue arrears derived from the potential for a gas tariff deficit in Spain. However, we believe that regulatory risk for electricity operations is significantly higher than for gas operations because the latter have, so far, not suffered any material economic imbalance. Uncertainty associated with the investment costs finally recognized by the government in its calculation of the asset-based remuneration, although we expect this will be very much in line with actual capital expenditures to date and any gap may be ultimately covered by the PBCE. A highly leveraged financial profile. This is reflected in a capital structure of 80% senior debt to total capital. The high leverage is partially mitigated by the relatively strong annual debt service coverage ratios (DSCRs) for the rating. We project the DSCR at 1.26x (minimum) and 1.29x (average) using our definition (which excludes interest income, for example) and our base-case assumptions.

Liquidity
ProjectCo's liquidity is strong, in our view: There will be a debt service reserve account (DSRA) covering the upcoming semiannual debt service payment, which is expected to be partially funded at issuance, with the remaining balance being covered by an on-demand, unconditional and irrevocable letter of credit provided by a 'BBB+'-rated bank. In addition, the project will put in place a sinking fund, to be funded with operating cash flows, covering the nonrecurrent costs budgeted for the following year. Although these reserves are not fully funded at the outset, as typical for investment-grade projects, we believe this is offset by: A relatively strong internal liquidity retention mechanism that will prevent dividend distributions if the DSCR is lower than 1.20x--on a one-year backward and forward looking basis--and the long-life coverage ratio is lower than 1.25x. An on-demand, unconditional and irrevocable letter of credit for 5% of the outstanding senior debt provided by a 'BBB+'-rated bank, which could be used after depleting the DSRA.

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Research Update: Watercraft Credit-Enhanced Project Bond For Spanish Gas Storage Refinancing Rated 'BBB Prelim'; Outlook Negative The provision of the PBCE by the EIB (see above).

Outlook
The negative outlook on the preliminary issue ratings mirrors that on Spain. Under our criteria, the long-term rating on Spain constrains the ratings on the proposed bonds. This is because we consider that ProjectCo has "high" exposure to Spain's country risk. A downgrade of Spain to 'BB+' or lower would automatically trigger a downgrade of the preliminary issue ratings by the same number of notches. In addition, we could downgrade the bonds if we considered that ProjectCo's ability to service its debt was no longer superior to that of the sovereign. Our current assessment is based on our view of the project and our belief that Spain's willingness and ability to impair ProjectCo's credit standing in periods of stress is limited. We could lower our rating on the bonds if ProjectCo faces unexpected and far-reaching regulatory changes that undermine its business risk or financial risk profile. Rating upside would be dependent on an upgrade of Spain. For more information, see "Presale Report: Watercraft Capital S.A.," published today on RatingsDirect.

Related Criteria And Research

Structured Finance General: Counterparty Risk Framework Methodology And Assumptions, June 25, 2013 Project Finance Construction And Operations Counterparty Methodology, Dec. 20, 2011 Nonsovereign Ratings That Exceed EMU Sovereign Ratings: Methodology And Assumptions, June 14, 2011 Use Of CreditWatch And Outlooks, Sept. 14, 2009 Updated Project Finance Summary Debt Rating Criteria, Sept. 18, 2007

Ratings List
New Rating Watercraft Capital S.A. Senior Secured

BBB prelim

Additional Contact: Infrastructure Finance Ratings Europe; InfrastructureEurope@standardandpoors.com

Complete ratings information is available to subscribers of RatingsDirect at

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Research Update: Watercraft Credit-Enhanced Project Bond For Spanish Gas Storage Refinancing Rated 'BBB Prelim'; Outlook Negative

www.globalcreditportal.com and at spcapitaliq.com. All ratings affected by this rating action can be found on Standard & Poor's public Web site at www.standardandpoors.com. Use the Ratings search box located in the left column. Alternatively, call one of the following Standard & Poor's numbers: Client Support Europe (44) 20-7176-7176; London Press Office (44) 20-7176-3605; Paris (33) 1-4420-6708; Frankfurt (49) 69-33-999-225; Stockholm (46) 8-440-5914; or Moscow 7 (495) 783-4009.

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