In the United States the majority of talk about liquefied natural gas (LNG) has focused on downstream regasification capacity. Another necessary part of the LNG value chain is shipping, and Standard & Poor's (S&P) suggests in a new analysis that strong fundamentals in the LNG market can support investment-grade credit ratings for LNG shipping projects.
"The tremendous investment in new LNG liquefaction facilities is matched by similar investment in the mid-segment of the value chain, LNG shipping," S&P writes. "Various sources note a current LNG fleet of about 190 vessels and an order book for about 130 to 140 more." At a cost of $150 million to $250 million per ship, "the level of investment represented by just the current order book is very large," S&P notes.
S&P says few LNG projects are rated, but the overall credit profile for LNG plants that have tight construction, solid operations and long-term offtake arrangements with strong counterparties generally argues that they hold investment-grade ratings, provided the host country also holds an investment-grade rating and has a good business climate. LNG exporters with investment-grade ratings are Trinidad & Tobago, Qatar, Oman and Australia. Shipping projects associated with these countries "have favorable prospects for investment-grade ratings," S&P says.
However, in the future it is likely that more LNG will come from countries viewed as less stable. For instance, Russia "has significant institutional risk issues," says S&P. Nigeria and Indonesia also are viewed as challenging. "LNG shipping projects associated with supply chains in these countries will find investment-grade ratings elusive."
On the contracting side, S&P says a long-term charter/hire agreement that lasts at least until debt maturity is necessary for an investment-grade rating. The rating agency notes that an LNG spot market, while only 10% of the total market now, is growing. Still it cannot support investment-grade financing. "In time, however, if spot markets mature and deepen, the exposure to short-term contracting risk may decline provided that the project ships have a favorable competitive position or resale value."
In evaluating charter/hire agreements, S&P says it looks for:
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