Standard & Poor's Ratings Services (S&P) in late August lowered the corporate credit rating on Cheniere Energy Inc. one notch, to "B" from "B+" to reflect a ring-fencing structure around Cheniere LNG Holdings LLC, a newly formed, indirect subsidiary that will own 100% of the interests in the Sabine Pass liquefied natural gas (LNG) terminal in southwest Louisiana and 30% interest in the Freeport, TX LNG terminal.
S&P's outlook on the Houston-based company is stable.
The two LNG terminals "currently provide essentially all of Cheniere's contracted cash flows," said credit analyst Swami Venkataraman. "Two other LNG projects are still in the process of being permitted and may or may not be built." The analyst was referring to Cheniere's other proposed LNG terminal projects in Corpus Christi, TX and Louisiana (see NGI, Aug. 1; May 30).
With a ring-fencing structure around Cheniere LNG Holdings, the parent company will be able to raise up to $600 million in the term loan B bank facility. The bank loan agreement contains covenants that require 100% of all currently contracted cash flows from the Sabine Pass project and 50% of all additional cash flows, if any, to be swept to repay the loan.
Additional cash flows could come from the currently uncontracted capacity at Sabine Pass or distributions from Freeport. The other 50% of additional cash flows will go into a collateral account that is pledged to the lenders at Cheniere LNG Holdings and would be available only for investments into its subsidiaries.
In related news, S&P assigned a "BB" rating to the proposed $600 million term loan to reflect the construction risk in the building of the LNG terminals, cash flow available for debt service and refinancing risk. S&P also assigned its "3" recovery rating to the bank loan, indicating meaningful (50-80%) recovery of principal in the event of a default.
Offsetting strengths in the LNG terminal construction, said S&P, include expectations of strong and stable cash flows at Sabine Pass once it is operating a fixed-price engineering, procurement and construction (EPC) contract at Sabine Pass with an experienced builder (Bechtel) that minimizes construction risks; and strong ring-fencing protections that insulate the credit quality of Cheniere LNG Holdings from the rest of the Cheniere organization.
"Construction risk is the most important risk, particularly given the stringent limitations on additional debt imposed by the bank loan agreement," said Venkataraman. "Significant cost overruns could necessitate an equity infusion from Cheniere, a much lower rated entity. The risk of cost-overruns is somewhat mitigated by the fixed-price EPC contract with Bechtel, and comfortable allowances for contingencies that have been built into the project costs."
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