-- U.S. midstream energy master limited partnership Cheniere Energy Partners L.P. (CQP) is issuing $750 million of senior secured notes due in 2018.
-- We are assigning our preliminary ‘B+’ corporate credit rating to CQP and a preliminary ‘B+’ issue-level rating to the loan.
-- The stable outlook reflects our expectation that CQP’s financial leverage and cash flows will remain weak for the next several years, but that its strong liquidity will allow it to meet its obligations until the Sabine Pass Liquefaction LLC (SPL; preliminary ‘BB+'/Stable) project begins to distribute cash.
On June 14, 2012, Standard & Poor’s Ratings Services assigned its preliminary ‘B+’ corporate credit rating to Cheniere Energy Partners L.P. (CQP), a master limited partnership (MLP) in the midstream energy sector. The outlook is stable. At the same time, we assigned our preliminary ‘B+’ issue-level rating and a preliminary ‘3’ recovery rating to the proposed $750 million senior secured term loan due 2018, indicating our assessment that secured creditors can expect meaningful (50% to 70%) recovery if a payment default occurs. The preliminary ratings are subject to our review of executed documentation that includes terms that Cheniere has represented and that we have included in our rating conclusion. We have not reviewed executed documents, and the final ratings could differ if any terms change materially.
The partnership will use the offering proceeds to partially fund the purchase of the Creole Trail Pipeline from CQP’s general partner, Cheniere Energy Inc. (CEI; B+/Stable/--), for $300 million, and to fund upgrades to allow it to service SPL’s natural gas requirements with bidirectional flow capability. Pro forma for the offering, CQP will have $750 million of total debt.
The preliminary ratings on CQP reflect a “fair” business risk profile and an “aggressive” financial risk profile under our criteria. The partnership’s fair business risk profile reflects our expectation of stable cash flows from its Sabine Pass LNG L.P. (SPLNG; BB+/Stable/--) regasification terminal, SPL’s more substantial future cash flows, and revenues from its Creole Trail Pipeline acquisition. Both of CQP’s subsidiary liquefied natural gas (LNG) projects rely primarily on long-term, take-or-pay capacity-based fee contracts with creditworthy counterparties that should provide predictable distributions to CQP assuming SPL’s construction is completed on time and budget.
The partnership’s aggressive financial profile reflects high financial leverage until 2017 when SPL comes online and begins to distribute cash to CQP. It also reflects CQP and general partner parent CEI’s aggressive financial and expansion policies. We expect them to continue to pursue other growth projects. On a stand-alone basis pro forma for the $750 million debt issuance, we expect CQP’s debt to EBITDA will be about 14x until SPL begins to distribute cash, at which time it will fall to about 2x. On a consolidated basis, we expect debt to EBITDA of about 30x, falling to 6x in 2018. In addition, CQP’s stand-alone measures could weaken further if it raises additional debt. (For more information on SPL, SPLNG, and CEI, please see our research updates on each entity published today.)
Pro forma for equity financings to fund development of SPL’s LNG export facility and five years of accretion, CQP will be owned 53% by CEI (including its 2% general partner interest), 43% by Blackstone CQP Investment, and 4% by the public. SPL and SPLNG are bankruptcy-remote project finance special-purpose entities that are wholly owned by CQP. Under our project finance criteria, we cap their ratings at three notches above our ratings on CQP.
Pro forma for the term loan issuance, liquidity is strong in our assessment, with sources exceeding uses by more than 2x; this is similar to a project financing where proceeds will largely prefund development costs through 2015 when the Creole Trail Pipeline upgrade is complete. In our calculation, primary sources of liquidity include net debt proceeds of about $700 million and funds from operations of approximately $50 million, almost entirely derived from SPLNG distributions. We have assumed that CQP’s primary uses of cash for the next 12 months will consist of the Creole Trail Pipeline purchase and debt service including mandatory 1% annual amortization, totaling about $350 million. These calculations do not reflect any further drop-downs from CEI or an increase in leverage at CQP.
We expect CQP’s term loan will have standard financial covenants including a maximum leverage ratio and a minimum fixed-charge coverage ratio, effective upon completion of the SPL project construction.
The rating on CQP’s proposed $750 million secured notes is preliminary ‘B+’ and the recovery rating is preliminary ‘3’, indicating our assessment that secured creditors can expect meaningful (50% to 70%) recovery if a payment default occurs. For the recovery analysis, please see the recovery report to be published following this research update.
The stable outlook reflects our expectation that CQP’s financial leverage and cash flows will likely remain weak for the next several years, but its strong liquidity will help it maintain operations and meet its obligations until the SPL project begins to distribute cash and financial measures strengthen. We could raise our ratings on CQP over time if construction at SPL is completed, and CQP’s financial position improves as a result. However, we think a ratings upgrade is unlikely in the near term, given the aggressive financial and growth policies that management has displayed in the past. We could lower our ratings on CQP if the SPL project encounters construction problems that could reduce or delay distributions. We could also lower the ratings if CQP or CEI significantly increase leverage or aggressively pursue growth opportunities that could keep our long-term forecast for CQP’s debt to EBITDA above 5x.