S&P assigns Sabine Pass LNP notes prelim 'BB+' rating
Overview -- Sabine Pass LNP L.P. (SPLNG) is issuing $420 million of senior secured notes due 2020. -- In conjunction with proceeds from Cheniere Energy Partners L.P.'s recent equity offering, SPLNG is redeeming its $550 million in 2013 notes. -- The project will have a synthetic debt service reserve fund for the new notes, in addition to the existing traditional debt service reserve fund for the 2016 notes. -- We are assigning a preliminary 'BB+' rating and preliminary '2' recovery to the new notes; the stable outlook reflects our expectation that the project can adequately service its interest-only debt through its upcoming maturities. Rating Action On Oct. 1, 2012, Standard & Poor's Ratings Services assigned its preliminary 'BB+' project rating to Sabine Pass LNG L.P.'s (SPLNG) offering of $420 million in senior secured notes due 2020. At the same time, we assigned a preliminary '2' recovery rating to the new notes, indicating expectations of substantial (70% to 90%) recovery in a default. The preliminary rating is subject to our review of executed documentation that includes terms that the sponsor Cheniere Energy Inc. (CEI; B+/Stable/--) has represented and that we have included in our rating conclusion. The final rating could differ if any terms change materially. The outlook is stable. The ratings on SPLNG's $1.67 billion 7.5% senior notes due Nov. 30, 2016, remain unchanged at 'BB+' with a '2' recovery; the outlook is stable. We expect to withdraw our ratings on the 2013 notes upon their redemption. Rationale Houston-based liquefied natural gas (LNG) project Sabine Pass LNG L.P. (SPLNG) is issuing $420 million of senior secured notes due 2020, which in conjunction with proceeds from parent Cheniere Energy Partners L.P.'s recent equity offering, will be used to tender for $550 million of SPLNG senior secured notes maturing in November 2013. As a result of the transaction, SPLNG will amortize $130 million of long-term debt and address its near-term maturities, both which we view as positive to the credit. Partially mitigating these positives, the new notes will be interest-only, which means further amortization might not occur until the 2016 notes come due, shortening the remaining repayment period covered by the terminal use agreements. In addition, the 2016 note indenture does not allow for a new debt service reserve account to support the 2020 notes, a structural feature that we typically expect in project financings. The sponsors plan to mitigate this by adding a cash-trap feature in the distribution account that will act as a "synthetic" debt service reserve account, sufficient to cover six months of debt service on the 2020 notes. Our preliminary ratings assume that the synthetic reserve is structured to effectively provide the same liquidity and protection to lenders as a traditional debt service reserve. Furthermore, we expect the new indenture will provide for the reinstatement of a traditional debt service reserve for the 2020 notes once the 2016 indenture matures. SPLNP's project finance structure and contractual foundation have investment-grade characteristics on a stand-alone basis. However, we limit the ratings differential between it and its parent Cheniere Energy Partners L.P (CQP; B+/Stable), and allow for a three-notch rating differential. Our ratings on SPLNG are higher than our ratings on CQP because of strong project ring-fencing protections that we believe insulate SPLNG's credit quality from that of CQP. However, we also note that CQP's creditors have a strong economic incentive to try to break the ring-fencing if CQP declares bankruptcy. Until the protections are affirmed in court, whether the ring-fencing measures will perform as intended remains uncertain. Therefore, we currently limit the separation at three notches to reflect uncertainty of the project's bankruptcy remoteness if the parent files. Consequently, our rating on SPLNG is linked to our rating on CQP, and its outlook mirrors that on CQP. In our opinion, the rating at SPLNG reflects the following strengths: -- Strong take-or-pay terminal use agreements with counterparties guaranteed by Chevron Corp. (AA/Stable/A-1+) and Total S.A. (AA-/Stable/A-1+) for 50% of the project's capacity until 2029 provide stable cash flows with no commodity exposure, adequate to support debt service; -- Strong ring-fencing protections that insulate its credit quality from that of parent CQP, and its other subsidiaries; -- A $130 million reduction in long-term debt as a result of the current transaction; and -- A debt-service reserve account that covers six months of interest payments on the notes. Although the new notes will have a nonstandard reserve mechanism, we expect it will be structured to have the same effect. In our view, the following weaknesses partly offset the transaction's strengths: -- Strong economic incentive for CQP's creditors to try to break the ring-fencing if CQP declares bankruptcy; -- Despite the current deleveraging, a highly leveraged financing structure with no scheduled amortization; -- Significant dependence on affiliate Sabine Pass Liquefaction LLC (SPL; BB+/Stable) for revenue sufficient to repay lenders; and -- Limited ability to incur meaningful additional debt. Liquidity We view SPLNG's liquidity as adequate. Although the project retains little unrestricted cash, it has minimal liquidity needs. Escalations in operating expenses are built into the terminal use agreement (TUA) pricing, and a 2% LNG retainage provision provides fuel for the regasification process. Cash uses consist of only modest maintenance capital requirements of less than $2 million per year. We expect TUA revenue of about $255 million from Chevron and Total, yielding distributable cash flow of about $55 million after covering operating expenses, maintenance and fees of about $50 million, and debt service of about $150 million. We believe SPL will have adequate cash flow to make its TUA payments to SPLNG once it completes construction on its LNG export facility in 2016. Assuming continued payment from all three TUA counterparties, we expect a debt service coverage ratio (DSCR) of about 2.8x (or about 1.4x excluding payments from SPL) until the next maturity in 2016. The project was in compliance with its requirement for a 2-to-1 fixed-charge coverage ratio as of June. 30, 2012, and we expect that it will continue to distribute substantially all excess cash until it refinances the project notes. Recovery analysis Our recovery rating on SPLNG's $2.1 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 Sabine Pass published on March 8, 2012, on RatingsDirect. Outlook The stable outlook on the rating reflects our expectation that the project can adequately service its interest-only debt through its upcoming maturities. We could lower the ratings if, after refinancing, amortization does not begin to occur in time to fully amortize project debt within the span of SPLNG's TUA agreements. The rating and outlook is also tied to our outlook on immediate parent CQP. Our outlook on CQP reflects significant progress on its SPL project and, based on this, CQP's improved ability to access capital markets as demonstrated by ultimate parent Cheniere Energy Inc.'s (CEI) repayment of all outstanding long-term debt. We base our CQP and CEI ratings on a consolidated approach, and do not expect them to rise until the new SPL project 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 increases leverage or aggressively pursues additional growth opportunities that could keep our long-term forecast for consolidated corporate debt to EBITDA above 5x. Related Criteria And Research -- "here 7254245&rev_id=10&sid=1017152&sind=A&", April 18, 2012 -- "here 7041103&rev_id=2&sid=1017152&sind=A&", Dec. 20, 2011 -- "here 6427283&rev_id=12&sid=1017152&sind=A&", Jan. 13, 2011 -- "here 4419919&rev_id=9&sid=1017152&sind=A&", Sept. 18, 2007 Ratings List Preliminary Ratings Assigned Sabine Pass LNG L.P. $420 Mil. Senior Sec. Notes Due 2020 BB+ (Prelim.) Recovery Rating 2 (Prelim.) Complete ratings information is available to subscribers of RatingsDirect on the Global Credit Portal at www.globalcreditportal.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.