Compania MEGA Rtg Remains on Watch Neg.

Business Editors

NEW YORK--(BUSINESS WIRE)--Dec. 22, 2000

Standard & Poors--Standard & Poor's triple-'B'-minus foreign currency rating on Compania MEGA's senior-secured debt remains on CreditWatch with negative implications based on the company's US$30 million of additional pari passu borrowing, which is in breach of existing loan covenants.

While considering other remedies, the company has indicated to Standard & Poor's that it may call for a bondholder meeting to ask for a waiver to avoid the effects of this current breach. In the original financing, the company covenanted that any additional debt would be subordinated to the outstanding rated notes. The additional new loans were assumed to finance increased construction costs due to changes in scope at the project.

Standard & Poor's expects MEGA to be able to resolve this issue and cure this technical default in a timely fashion, probably before the second week of January. Shareholders are considering guaranteeing a subordinated bank loan that will be used to pay down the US$30 million obligation. These actions should be concluded by the second week of January. In the unlikely event that this situation is not resolved by then, Standard & Poor's might downgrade the outstanding rated debt to speculative grade.

The ratings of Compania MEGA were placed on CreditWatch Nov. 1, 2000, following Standard & Poor's decision to take a similar rating action on the local and foreign currency ratings of the Republic of Argentina. After the sovereign was downgraded on Nov. 14, 2000, several entities, including Compania MEGA, remained on CreditWatch with negative implications pending review of their local currency ratings. This review will, in turn, factor in the specific direct and indirect impact of weakened sovereign creditworthiness and deteriorating economic conditions.

MEGA is a natural gas separation plant, a pipeline, and gas fractionation facility project currently under construction in Argentina.

The triple-'B'-minus rating reflects the following risks:

--Exposure to market prices-sales of the project's products (ethane, liquefied petroleum gas (LPG), natural gasoline) are governed by long-term sale agreements; however, product pricing is determined by market prices.

--The Brazilian state-owned oil company-Petrobras (not rated)-is a sponsor of the project and the primary purchaser of the natural gasoline and LPG.

--The project is highly leveraged, at 70% of the total $676 million cost.

--MEGA uses an unconventional fractionation technology that does not first separate carbon dioxide from the natural gas feed; MEGA has limited experience doing this.

Offsetting these risks at the triple-'B'-minus level, however, are the following factors:

--The project is being built by a consortium, including the JGC Corp., on a fixed-price, turnkey basis with adequate liquidated damages; and the sponsors are providing completion guarantees (some on a several basis, while a portion is joint and several) to help mitigate construction risk.

--The project is obtaining insurance to help protect the lenders against force majeure events.

--The project has contracted to sell 500,000 metric tons per year of ethane to Petroquimica Bahia Blanca S.A.I.C. (PBB), as well as 600,000 metric tons of LPG and 210,000 metric tons of natural gasoline to Petrobras under 10-year contracts. PBB is 63% owned by Dow Chemical Co., 27% by YPF S.A., and 10% by Itochu Corp.

--Natural gas feedstock costs under the gas-supply assignment agreement are indexed against a basket of market-priced hydrocarbon products; this mechanism will help mitigate against product-pricing risk.

--The mechanisms that adjust the pricing of the project's products are similar to those that adjust the cost of the natural gas feedstock for the project. The result is a stable operating margin of around 50% with the project most vulnerable to a significant and prolonged decrease in the hydrocarbon pricing environment.

--Even without long-term sales agreements with Petrobras and PBB, the project can still sell its products on the open market.

--Base case debt service coverages are adequate, with minimum and average debt service coverage of around 1.9 times (x) and 2.6x, respectively.

--Lenders benefit from a six-month debt service reserve and a cash flow distribution test that stops distributions to the owners if cash flow to debt service falls below 1.3x.

MEGA is a special purpose entity that will finance, build, and operate the different components of this project, which include a natural gas separation plant in Loma la Lata (Neuquen province); a pipeline to transport the stripped natural gas liquids (NGL) to Bahia Blanca (Buenos Aires province); and a gas fractionation facility to extract ethane, LPG, and natural gasoline from the NGL stream at Bahia Blanca. The project sponsors expect operations to begin by the end of 2000. As of September 2000, the overall project progress was 98.75% complete. YPF S.A. (foreign currency rating: triple-'B'-minus/CreditWatch Neg/--), which owns 38% of the project; Petrobras, which owns 34%; and Dow Chemical Co. (single-'A'/Stable/'A-1'), which owns 28%, are also primary purchasers of the project's products. The project, however, is a single-purpose entity, and the project's debt is nonrecourse to the sponsors, Standard & Poor's said. -- CreditWire