The ratings reflect, in our opinion, the following credit strengths:
-- Access to the North Field gas field owned by parent company, Qatar Petroleum (QP; foreign currency AA/Stable/--), which is likely to ensure that the project will not face a shortage of gas reserves, and the competitive cost structure of the project due to, for example, low feedstock gas prices from this field;
-- Good operating performance to date as demonstrated by availability under trains 3 to 7, with a combined average availability of approximately 98% in 2011. Although the company’s dispute with offtaker, Distrigas, on prices remains in arbitration, the dispute has neither affected flows of cargo to Distrigas nor the company’s financial results;
-- The continued robust crude prices that have supported senior DSCR (Debt Service Coverage Ratio) of 8.7x in 2011 according to Standard & Poor’s criteria (see Updated Project Finance Summary Debt Rating Criteria, Sept. 18, 2007, e.g. excluding interest income), with forecast levels above a minimum of 3.9x under our base-case scenario over the next four years (2012-2016);
-- The project’s resilience under stress, as demonstrated by the ‘break-even’ point for the project only occurring after a 65% reduction in revenues and 20% reduction in EBITDA margin relative to Standard & Poor’s base case; and
-- The significant experience of QP and ExxonMobil Corp. (AAA/Stable/A-1+)(directly in the case of RasGas II and indirectly with RasGas 3) as the primary owners of RasGas II and 3, with 70% and 30% stakes, respectively.
These strengths are offset, in our view, by the following credit weaknesses:
-- The single asset nature of the LNG (liquefied natural gas)-producing trains, together with insurance proceeds that do not cover the full replacement cost of rebuilding such trains in the event of a significant force majeure incident;
-- The inherent volatility of LNG prices and exposure to market price risks and overall demand for LNG;
-- The plant’s location within the Middle East where regional volatility could temporarily impair production and deliveries beyond six months; and
-- Medium-term refinancing risk through the requirement to refinance, for example, up to $700 million bond and bank facilities in 2012 and $1.1 billion bullet payment in 2014.
The project also benefits from long-term SPAs (sale and purchase agreements), which are covered by the production from trains 3, 4, 5, 6 and 7, and for the duration of the term of the debt and beyond. This exposes the project to the counterparty risk of each of the offtakers. However, we do not consider that this currently creates a counterparty dependency for the project in view of the project’s ability to sell to the spot market in LNG. A change of sales policy to rely on the established contracts could expose the project to the counterparty risk.
The transaction’s liquidity is supported by a debt service reserve which covers six months of future debt service. Under the Common Security Agreement, the company is required to fund all debt service (including principal and interest) on a six-month look-forward basis as a condition prior to making any distribution to shareholders.
As of March 31, 2012, RasGas had reserved within its debt service reserve account the full $500 million Series E bond principal amount and $214 million of the Exxon Mobil co-loan, both maturing on Sept. 30, 2012.
The senior secured bonds issued by RasGas II and RasGas 3 have a recovery rating of ‘1’, indicating Standard & Poor’s expectation of very high (90%-100%) recovery of principal in the event of a payment default. To date, there has been limited experience regarding default, loss, or recovery in this sector or in Qatar.
The stable outlook reflects our expectation of the continuing solid financial and operational performance of RasGas, and our understanding that RasGas has fully reserved cash to pay the $500 million bond due in September 2012, and that a similar reserving mechanism will be applied ahead of the $1.1 billion bullet maturity in September 2014.
A positive rating action would be contingent on continued good operations in tandem with attractive medium- to long-term market fundamentals. We could lower the ratings, or change the outlook to negative, if spot market conditions deteriorate, increasing the reliance of project cash flows on offtakers, whereby the project’s credit quality may then be linked to that of the offtakers.