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Rating Action:

Moody's affirms Ba3 to Sabine Pass Liquefaction's senior secured debt following $3.7 billion bank loan upsize; outlook stable

29 Jun 2015

Approximately $13.1 billion of debt affected

New York, June 29, 2015 -- Moody's Investors Service affirmed the Ba3 rating on Sabine Pass Liquefaction LLC's (SPL) senior secured debt consisting of $8.5 billion of bonds and $4.6 billion of bank loans, which was recently upsized by $3.7 billion. We also affirmed Sabine Pass LNG, L.P.'s (SPLNG) B1 rating on its $2.1 billion of senior secured bonds. The rating outlooks for SPL and SPLNG are stable.

Proceeds from the $3.7 billion upsizing in SPL's bank loan along with additional reliance on operating cash flow will fund a fifth liquefied natural gas (LNG) train and extensive improvement of common facilities, such as new power generation equipment. Total sources of funds for the construction of SPL consist of $13.1 billion of debt, $2 billion of equity, $2.9 billion of operating cash flows including margin on commission LNG sales, and $188 million of sales tax rebates.

RATINGS RATIONALE

The Ba3 rating affirmation reflects both positive and negative developments associated with SPL's Train 5 expansion. Positive changes include a new $1.2 billion working capital facility and SPL's substantial progress on its natural gas feedstock sourcing plans. While SPL's $1.2 billion working capital (WC) facility is primarily meant for feedstock purchases and collateral posting requirements, the WC facility also includes a $460 million sublimit for a debt service reserve (DSRA) letter of credit (LC) and a $200 million sublimit for general corporate purposes. We view the new WC facility as materially increasing SPL's liquidity position since it addresses the currently unfunded 6-month DSRA and provides liquidity to backstop a substantial amount of future feedstock purchase and collateral posting requirements. Regarding the latter, SPL has made substantial progress on its feedstock sourcing and transportation plans including sufficient contracted natural gas transportation for all five LNG trains and a large natural gas supply portfolio with numerous counterparties at varying pricing.

However, the Ba3 rating also considers additional credit challenges associated with the planned fifth LNG train including a 39% increase in total debt relative to a 11-15% increase in annual cash flow depending on the scenario, decline in proforma debt service coverage ratio (DSCR) financial metrics to the 'Ba' category (instead of the 'Baa' category) under Moody's Case, continued delays in direct construction, and incremental construction risk associated with a fifth LNG train and new common facilities. The disproportionate debt increase reflects Train 5 's relatively high EPC costs since the construction costs include spending on common infrastructure that benefits a potential 6th LNG train, more difficult soil conditions, and SPL's growth beyond its ability to use existing infrastructure at SPLNG. In addition to higher debt, the Train 5 expansion results in a large jump in forecasted O&M costs partly owing to an increase in contractual payments back to Total S.A., a Train 5 and SPLNG off-taker. The combination of disproportionally higher debt, longer construction period, and operating cost increases ultimately results in lower pro-forma DSCR financial metrics. However, we recognize that the incremental cost of a sixth LNG train would be substantially lower cost than Train 5 thus leaving open the possibility of stronger financial metrics if another LNG train were to be built. Such an expansion is likely if SPL is able to source additional long term contracts for Train 6.

Construction & Contingency Update

On the construction front, SPL continues to move forward albeit behind target dates with overall progress at 90.8% (versus 92.6% planned) for Trains 1 & 2 and 67.7% (versus 70.1% planned) for Trains 3 & 4 as of May 2015. However, direct construction remains behind target schedule at 81.9% complete (versus 85.6% planned) for Trains 1 & 2 and 29.2% complete (versus 37.8% planned) for Trains 3 &4. Skilled labor availability and adverse weather have been major challenges to SPL's construction progress relative to its planned targets. SPL continues to anticipate catching up on schedule and as such, its target completion dates have not changed. On the contingency side, SPL's expects to increase this figure to the independent engineer's recommended amount as part of the Train 5 financing; however, the project will have additional funds through excess operating cash since SPL will not use all of its operating cash flow to fund construction. However, some of these funds could be used in a Train 6 expansion.

Key Credit Factors

Beyond recent developments, the main credit factors supporting SPL's underlying Ba3 senior secured rating are its long-term contract with investment grade off-takers, the possibility of 'Ba' category DSCR financial metrics emerging during operations, and EPC contracts with Bechtel. Sizeable third party equity investment of $2 billion, mostly traditional project finance protections for the senior secured bank loans, and the utilization of existing infrastructure are also considered positive factors. Key credit risks include the considerable construction challenges such as the reliance on $2.9 billion of operating cash flow to fund construction, operating period execution risks such as sourcing gas feedstock, major debt maturities from 2020 through 2025, and SPL's historical inexperience at operating liquefaction plants. Other key considerations include management's aggressive financial policies, debt at the Creole Trail Pipeline that indirectly increases leverage, and as discussed above, uncertainties on a Train 6 expansion.

SPLNG Rating Affirmation

SPLNG's B1 rating reflects long-term contracts with highly rated third parties for approximately 50% of revenues, acceptable operational performance since 2009, and some project finance protections. An affiliate contract with SPL should also provide greater cash flow certainty once SPL achieves operations. The B1 rating also considers SPLNG's high standalone leverage, uneconomic competitive position, a large debt maturity in 2016 that coincides with SPL's construction period, and the likely continuation of low financial metrics until SPL reaches commercial operations. Until the start of the SPL LNG trains, we expect SPLNG will achieve an interest coverage ratio of around 1.2 to 1.4 times and FFO/Debt of only 2% to 3%, which is consistent with recent financial performance.

SPL and SPLNG's stable rating outlook reflects our assumption that SPL's construction will be completed without substantial delay or cost overruns. It also considers our expectation that SPL and SPLNG will meet their performance obligations under their respective off-take contracts.

SPL and SPLNG's ratings are unlikely to be positively affected in the near term given SPL's delays in construction and the increased leverage associated with Train 5 financing. Positive trends that could lead to an upgrade include SPL's successful construction completion of multiple LNG trains and demonstrated good operational performance at SPL and SPLNG.

SPL and SPLNG's ratings could be downgraded if SPL incurs significant construction cost overruns or delays, if SPLNG incurs major operating problems or if further expansion adds significant financial and construction risk. SPL and SPLNG's ratings could also face negative rating action if SPL's feedstock sourcing strategy introduces significant imperfections or cash flow volatility or if any of SPL's governmental authorizations are revoked or limited.

Sabine Pass Liquefaction LLC (SPL) expects to build and operate a nameplate 22.5 million ton per annum (mtpa) liquefied natural gas (LNG) project located in Cameron Parish, Louisiana next to the existing Sabine Pass LNG L.P.'s regasification plant (SPLNG). SPL's output is effectively contracted with BG Group, Gas Natural SA, Korea Gas Corporation, GAIL, Centrica, and Total SA under 20 year off-take contracts. Cheniere Energy Partners (CQP) owns SPL. CQP is directly or indirectly owned by private equity funds managed by Blackstone, Cheniere Energy, and public investors.

The principal methodology used in these ratings was Generic Project Finance Methodology published in December 2010. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this rating action, and whose ratings may change as a result of this rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Clifford J Kim
Vice President - Senior Analyst
Project Finance & Infrastructure
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Chee Mee Hu
MD - Project Finance
Project Finance & Infrastructure
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's affirms Ba3 to Sabine Pass Liquefaction's senior secured debt following $3.7 billion bank loan upsize; outlook stable
No Related Data.
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