Fitch Ratings has affirmed Nakilat Inc’s (Nakilat) USD850 million series A senior secured bonds due 2033 at ‘A’ and USD300 million series A subordinated second-priority secured bonds due 2033 at ‘A-‘. The Outlooks are Stable.
The series A senior secured bonds are rated one notch above Nakilat’s senior debt Standalone Credit Profile (SCP) of ‘A-‘, as per Fitch’s Government-Related Entities (GRE) Rating Criteria. The series A subordinated secured bonds are notched down from the senior debt to reflect their subordination.
In affirming the ratings Fitch considers likely support from Qatar, which indirectly owns Nakilat, that the replacement of Nakilat would be possible albeit with some disruption and that its default would pose a limited threat to the government’s financing.
KEY RATING DRIVERS
The ratings consider the following key drivers as per our GRE Rating Criteria:
Indirect State Ownership: Status, Ownership and Control – Moderate
Nakilat does not have special legal status in Qatar. It is 100%-owned by Qatar Gas Transport Company Limited (QGTC), which is a joint stock company part-owned by state-owned Qatar Petroleum (QP) and government funds. This establishes a close indirect relationship between Nakilat and the state of Qatar. Moreover, despite QP owning only 1% of QGTC, it has the right to appoint the Chairman and the vice Chairman of QGTC under the Articles of Association.
State Support is Likely: Support Track Record and Expectations – Strong
Nakilat is structured as a ring-fenced project without explicit sovereign guarantees. There is no track record of financial support from the government, but it has never been needed as Nakilat’s financial position has been strong. We deem state support to Nakilat in case of need as likely, but through QP and Nakilat’s charterers rather than by the state of Qatar directly servicing Nakilat’s debt.
Replacement Possible with Temporary Disruption: Socio-political Implications of Default – Moderate
Nakilat is vertically integrated into the liquefied natural gas (LNG) supply chain, with revenues coming from majority state-owned LNG producers, Qatargas and Rasgas (AA-/Stable). There could be some replacement vessels, as these assets are moveable and there are many LNG transportation vessels available, although we expect that the transition process to a different vessel provider could trigger a temporary disruption to Qatari LNG exports. Disruption could have some economic repercussions at the level of the government as Nakilat remains an important element of the LNG supply chain.
Limited Threat on Government’s Financing: Financial Implications of Default – Moderate
A default of Nakilat would have a moderate impact on the availability and cost of finance for the government, in our opinion.
Standalone Senior Rating ‘A-‘
Fitch considers that Nakilat’s senior debt SCP is consistent with a ‘A-‘ rating, as per its rating criteria for infrastructure and project finance. This is due to the availability-based nature of the revenue, limited cost risk and the debt structure displaying some floating interest rates and refinancing risks, with an annual profile debt service coverage ratio (DSCR) of 1.36x.
Charter-based Revenue with High Historical Availability: Revenue Risk – Stronger
Nakilat derives its revenue from availability-based charter payments for its 25 vessels. There is no pass-through of availability deductions but historically these have been minimal and are expected to remain at similar levels. Moreover, the time charters include a generous time allowance for the assets to be unavailable during dry-docking, without incurring any deductions. We view the charterers QatarGas and RasGas as strong counterparties. Nakilat is strategic in the Qatari LNG value chain and consequently we see little incentive for the charterers to terminate the contracts.
Cost Increases Passed Through to Charterers: Operation Risk – Stronger
Increases in operating expenditures are passed through to the charterers through charter rates. There is an operations & maintenance (O&M) reserve of USD300,000 per vessel in place, as well as a dry-docking reserve funded through daily distributions of USD1,600 per vessel and per day. Voyage costs, fuel costs and port charges are borne by charterers. Ship management has so far been outsourced to Shell International Trading and Shipping Company (Shell), which has achieved high operating performance historically. Operations, however, are progressively being transferred from Shell to Nakilat itself. Fitch expects the quality of operations to remain at similarly high levels.
Long-Life Fleet and Dry-Docking Exercises: Infrastructure Renewal and Development – Stronger
Each LNG vessel has a 40-year design life, which goes well beyond the tenor of the debt. This is a long asset life and Nakilat’s fleet is fairly new and modern, reducing the need for major maintenance and repairs in the early life of the assets. The dry-docking exercises that take place every five years help address the ongoing maintenance needs of the fleet.
Refinancing and Interest-Rate Risks: Debt structure – Midrange (Senior and Junior Bonds)
Both rated bonds fully amortise until maturity in 2033, with the senior bonds amortising from 2021 only. Some of the senior and subordinated bank debt facilities are expected to be refinanced in 2025. The bank facilities are exposed to floating interest rates. Nakilat’s interest-rate exposure is such that approximately 80% of the aggregate outstanding debt is at a fixed rate, or hedged, until 2025. The hedges extend beyond 2025 and together, with the fixed-rate bonds, mitigate approximately 55% of base interest-rate risk exposure thereafter. Both senior and junior bonds benefit from a six-month debt service reserve account.
The Fitch rating case results in a profile annual DSCR of 1.36x for the senior bonds. We assess this as being in line with an ‘A-‘ rating for the senior bonds. Operating expenses could increase by up to 83% before reaching break-even, on the senior bonds, and 48% on the junior bonds. Availability could drop to 289 days per year on the senior bonds, and 318 days on the junior bonds. This demonstrates resilience.
Rasgas operates in the same country and related market sector. Rasgas II and III operate three and two LNG trains at Ras Laffan Industrial City with a capacity of 29.7mtpa. The project derives its revenues from the sale of LNG and associated products, largely under long-term sale-and-purchase contracts.
Rasgas is rated two notches higher than Nakilat’s senior bonds, based on Fitch’s GRE Criteria, as it is an upstream gas and LNG producer that contributes to a significant share of the government’s budget and thus is more important and operationally integral to the state than Nakilat.
Factors that could, individually or collectively, lead to positive rating action/upgrade:
– An upgrade is unlikely due to limited ability to sufficiently improve performance.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
– A downgrade of Qatar’s sovereign rating;
– A reduction in implied support and commitment from the government, as well as importance to and ownership by Qatar; and
– Deterioration in SCP due to an increase in leverage or a sustained deterioration of operational performance.
BEST/WORST CASE RATING SCENARIO
International scale credit ratings of Public Finance issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of three notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from ‘AAA’ to ‘D’. Best- and worst-case scenario credit ratings are based on historical performance.
Nakilat’s portfolio comprises 25 large LNG vessels in Qatar. Nakilat receives revenue through availability-based time charter agreements with four charterers. The vessels are an integral part of the charterers’ LNG supply chain and are therefore important within the Qatari LNG industry. Nakilat’s senior and subordinated bonds, together with loans from Export Credit Agencies and commercial banks, were used to finance 90% of the 25 vessels, built in Korea.
Nakilat’s operational performance is high, with availability above 99%, and in line with previous years.
Nakilat’s vessels follow a five-yearly dry-docking cycle, which mostly goes according to plan. The time charters allow the assets to be unavailable for a generous 27 days during dry-docking exercises without incurring any deductions. At present 23 out of the 25 vessels have been through this exercise. Plans are in place for dry-docking the last two vessels while managing restrictions caused by the coronavirus pandemic.
At end-2017, 10 vessels among the 25 had been transferred to in-house management. This follows the plan that was presented to Fitch. In 2018 and 2019, there was a break in the transfer of vessels to in-house managements so that the technical staff could focus more on the dry-docking exercise taking place during this period. This is in line with the plan. There is no change to the timeline of the O&M management transfer process that was presented to Fitch.
Nakilat receives its revenue based on its availability and therefore its revenue is not directly affected by coronavirus or the recent dramatic reduction in the prices of oil and gas.
The senior annual DSCR for September 2019 is 1.45x, and the Fitch-calculated junior annual DSCR is 1.31x, which reflects stable financial performance.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
The highest level of ESG credit relevance, if present, is a score of 3. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity(ies), either due to their nature or to the way in which they are being managed by the entity(ies).
Source: Fitch Ratings