TEXT-S&P Raises Ratings On Cheniere Energy And Sabine Pass LNG

Overview

-- Houston, Texas-based liquefied natural gas company Cheniere Energy Inc. (CEI) has repaid $284.5 million of 2018 debt using proceeds from recent equity issuances.

-- Remaining equity proceeds and reduced debt service have improved the company's liquidity profile and we expect that it will be able to repay its convertible notes due in August 2012, leaving it debt free.

-- CEI's subsidiary Cheniere Energy Partners L.P. (B+(prelim)/Stable) is issuing $750 million in term loans to purchase CEI's Creole Trail Pipeline for $300 million and 12 million class B units that will further improve CEI's liquidity, while reducing its revenues.

-- Cheniere Energy Partners' subsidiary Sabine Pass Liquefaction LLC (BB+(prelim)/Stable) is issuing a total of $3.825 billion in term loans to finance its liquefied natural gas export facility, and will replace Cheniere Investments as a terminal use agreement counterparty to Sabine Pass LNG L.P.

-- We are raising the rating of CEI by two notches to 'B+' and that of its subsidiary Sabine Pass LNG by two notches to 'BB+'.

-- The stable outlook reflects CEI's lower leverage and improved liquidity.

Rating Action

On June 14, 2012, Standard & Poor's Ratings Services raised its corporate credit rating on Cheniere Energy Inc. (CEI) by two notches to 'B+' from 'B-' and the project rating of its subsidiary Sabine Pass LNG L.P. (SPLNG) by two notches to 'BB+' from 'BB-'. The outlook is stable and the recovery rating on SPLNG's senior secured project debt remains unchanged at '2'.

Rationale

The ratings upgrade of CEI reflects its June repayment of $284.5 million in 2008 senior loans due 2018 with proceeds from equity offerings totaling about $682 million since December 2011. The remaining equity proceeds and reduced debt service resulting from repayments of about $580 million in debt this year have significantly improved CEI's liquidity position and we believe it will be able to repay its $205 million convertible senior unsecured notes by the August 2012 maturity. CEI's recent capital market transactions indicate an improved ability to access capital markets resulting from significant progress on the company's liquefaction project at subsidiary Sabine Pass Liquefaction LLC (SPL).

SPL is issuing a $2.575 billion term loan A and $1.250 billion term loan B to finance construction on a9 million metric tonne per year LNG liquefaction export facility. We have issued a preliminary BB+/Stable rating to the project and believe the prospect for improved cash flows to CEI beginning in 2016 has increased. The ratings upgrade of SPLNG reflects the CEI upgrade because we cap SPLNG's rating at three notches above its ultimate parent under our project finance criteria. It also reflects the assumption by SPL of Cheniere Energy Investments LLC's terminal use agreement with SPLNG, which will provide SPLNG with cash flows from a stronger counterparty.

At the same time, we note that CEI's rating now reflects expected debt at CQP of $750 million. We expect that CQP will generate negative cash flow for the next four years due to development costs on the Creole Trail Pipeline upgrade and weak distributions from SPLNG until SPL becomes its terminal use agreement counterparty after it begins commercial operations. However, we believe it should have enough liquidity when it completes its financing to remain solvent until SPL begins to distribute cash.

CEI is a Houston-based energy company that mainly engages in liquefied natural gas (LNG)-related businesses. Through its subsidiary, Cheniere Energy Partners L.P. (CQP), it owns and operates the SPLNG regasification terminal project in Cameron Parish, La. CQP is also pursuing a project to add liquefaction services to the Sabine Pass terminal by 2016 in hopes of exporting U.S.-produced natural gas. The project faces numerous development cycle risks, but successful completion would result in stronger cash flows to CQP, which could improve its credit profile over time.

Our ratings on the Sabine Pass project, which was completed in 2009, are higher than our ratings on CEI because of strong ring-fencing protections that we believe insulate SPLNG's credit quality from that of CEI, and allow for the maximum three-notch rating differential under our project finance criteria. We cap the ratings differential for the two entities because SPLNG currently constitutes the bulk of CQP's and CEI's contracted cash flows. This gives CEI's and, in the future, CQP's creditors a strong economic incentive to try to break the ring-fencing if either parent declares bankruptcy.

Liquidity

CEI's 12-month liquidity outlook is currently adequate. CEI has raised significant equity proceeds and paid off its 2008 senior loans due 2018. We now expect that it will have a pro forma sources in excess of uses ratio of about 1.4x. We expect about $1.4 billion of total sources consisting of about $475 million of cash before equity raises, and about $944 million in cash from recently completed equity raises. Total uses of about $1 billion include about $40 million of operating losses, $200 million in net investment flows ($300 million in receipts from the Creole Trail Pipeline drop-down and a $500 million investment in CQP), and about $777 million in debt repayments.

Recovery analysis

Our recovery rating on SPLNG's $2.2 billion in senior secured notes is '2', indicating our expectation for a substantial (70% to 90%) recovery of principal if a payment default occurs. For more information, see the transaction update on SPLNG published March 8, 2012 on RatingsDirect.

Outlook

The stable outlook reflects CEI's lower leverage and improved liquidity. Upon repayment of CEI's convertible notes on or before Aug. 1, 2012, we may withdraw the rating. If we maintain the rating we expect to base it on a consolidated approach with CQP, and do not expect it to rise until SPL nears operation and begins cash distributions, improving CQP's credit profile. However, given management's aggressive financial and growth policies in the past, we do not anticipate raising the rating in the near term. We could lower our rating if the SPL project has construction problems that could reduce or delay distributions. We could also lower the ratings if CQP or CEI significantly increase leverage or aggressively pursue additional growth opportunities that could keep our long-term forecast for consolidated debt to EBITDA above 5x.