-- 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
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.
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
-- 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
-- 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.
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.
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.
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
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
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
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7041103&rev_id=2&sid=1017152&sind=A&", Dec. 20, 2011
6427283&rev_id=12&sid=1017152&sind=A&", Jan. 13, 2011
4419919&rev_id=9&sid=1017152&sind=A&", Sept. 18, 2007
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