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Rating Action:

Moody's affirms Limetree Bay Terminals' Ba3 rating following increase in term loan; outlook stable

30 Jun 2017

$465 million of rated debt affected

New York, June 30, 2017 -- Moody's Investors Service, ("Moody's") has today affirmed the Ba3 rating on Limetree Bay Terminals, LLC's (LB Terminals) 7-year senior secured term loan following LB Terminals' intention to upsize its senior secured term loan by $25 million to $465 million. The rating outlook is stable.

Proceeds from the $25 million term loan increase will be used to finance capital expenditures.

RATINGS RATIONALE

LB Terminals' Ba3 rating continues to balance the limited operating complexity of storage terminals, project finance features of the transaction and some revenue visibility provided by a 10-year contract with a US subsidiary of international oil and gas company, China Petroleum and Chemical Corporation (Sinopec Corp (A1 stable)), against the project's high initial leverage (debt/EBITDA of around 5.4x based on the upsized term loan and management's base case for 2017), the lack of an operating track record, ramp-up risk associated with bringing back all of the storage capacity, and substantial contract renewal risk.

The facility is ramping-up its storage operations as it was bought out of bankruptcy in early 2016 subsequent to the Hovensa refinery shutting down in 2012. Uncertainty is high around management's ability to successfully strengthen the assets' competitive position against peers, execute a large capex project, renew existing contracts and enter into new contracts as more capacity comes online. Q1 2017 performance was largely in line with expectations. Revenue came in slightly softer than expected due to lower ship visits and marine fee revenues which was offset by good cost control. Free cash flow generation was negative (-$31 million) and negatively impacted by working capital swings and a $6 million bitumen tank settlement which will eliminate a future obligation under its operating agreement with the government of the U.S. Virgin Islands.

The rating takes into account the scale of the facility relative to other peers in the Caribbean region with around 143 tanks and 34 mmbbls of storage capacity once all capacity has been brought back online. Plans to expand its port to provide access to deeper-water vessels should benefit its competitive position as its current depth restriction of around 55 ft is its major disadvantage in the crude oil storage segment compared to other Caribbean storage terminals.

Moody's also considered the high leverage on the project (5.4x debt/EBITDA at closing including maintenance expense) and the increase in term loan shortly after rating assignment; limited equity (debt/book capitalization of close to 80%) and the project's modest liquidity profile. These constraints are balanced against the existence of project finance features, a cash sweep that should support future deleveraging; the sponsor's experience with managing storage assets, plant operational expertise as many of the employees are former Hovensa employees, and the resiliency of the cash flow to extreme downside scenarios.

Management forecasts a steady deleveraging over the term loan period supported by renewal of existing contracts and additional planned contracts. As such management expects DSCR to improve from around 2.0x in 2017 to an average DSCR of around 4.0x throughout the period 2017-2023 and a deleveraging from 5.4x debt/EBITDA at closing to below 1.0x by 2023.

Moody's also considers the high execution risk associated with management's projections and the assigned Ba3 rating reflects the risk that LB Terminals might not be able to renew contracts and add new customers as projected.

The stable outlook reflects Moody's expectation that LB Terminals will build a track record of renewing expiring existing contracts and entering into new contracts as additional tank capacity comes online. We expect that the project will at least maintain a debt service coverage ratio (DSCR) around 1.75x and can achieve FFO/debt in the high single digit range in the initial three years of the project with further improvements beyond that. The cash flow sweep and target debt balance requirement should support a continued deleveraging. We understand that the existing target debt balance schedule remains unaffected by the $25 million term loan increase.

WHAT COULD CHANGE THE RATING UP?

- Successful ramp-up of operations and a demonstrated track record of securing additional contracts that supports the ramp-up and renewing maturing existing contracts

- Credit metrics closer to sponsor's base case with Debt/EBITDA trending to 4.0x, a DSCR in that exceeds 3.0x in 2018 with expectations for further improvement from the excess cash sweep

WHAT COULD CHANGE THE RATING DOWN?

- Inability to build-up adequate liquidity reserve for managing working capital

- Inability to renew contracts and contract new customers

- No visibility for deleveraging with inability to decrease Debt/EBITDA to below 5.0x and improve DSCR to around 2-2.5x over the next 18-24 months as the terminal is ramping up its operations

LIQUIDITY

LB Terminals' liquidity profile is modest. Lenders benefit from a 6-month debt service reserve account (around $15.8 million as of March 31, 2017). Term loan proceeds were used to finance a $120 million liquidity reserve to finance a portion of the Single Point Mooring System (SPM) Buoy Project and fund tank-field restarts. At end of May 2017, the project had $6.6 million in restricted cash and around $80.3 million LC capacity of which currently around $64.5 million is available.

Management expects to create a $10 million operating reserve for working capital purposes, however this is not a requirement under the term loan documentation. LB Terminals has no working capital facility or revolving credit facility at closing of the transaction. This leaves limited cushion for unforeseen events that could lead to negative free cash flow generation.

LEGAL SECURITY

Lenders benefit from a first lien on all material assets of the borrower and typical project finance cash flow waterfall. The refinery assets are initially included in the collateral but represent a permitted disposal under the agreement.

The transaction provides for a 0.25% required quarterly amortization (around $4.4 million per annum) starting June 30, 2017 and a cash sweep which should support additional deleveraging over time. The cash sweep is defined as 100% of excess cash flow through March 31, 2018 with a quarterly sweep thereafter subject to the greater of (i) 50% of excess cash flow and (ii) the target debt balance. We expect that excess cash flow will be invested in growth capital expenditure projects though the first quarter of 2018.

The term loan includes a lenient maintenance financial covenant of 1.1x DSCR, which is tested quarterly commending March 31, 2018 and allows for equity cures. The term loan documentation allowed for an additional $25 million facility/term loan which has been exhausted with this $25 term loan increase.

OBLIGOR PROFILE

Limetree Bay Terminals, LLC is a joint venture between an affiliate of private equity sponsor ArcLight Capital Partners (80%) and an affiliate of Freepoint Commodities, LLC (20%). The project is a storage terminal, refinery and marine facility on around 1,500 acres of land on the south shore St. Croix, US Virgin Islands. The facility was bought out of bankruptcy in early 2016 for around $320 million, and an additional approximately $100 million has been invested since the acquisition.

The facility is the former Hovensa facility that was shut down in 2012 due to losses in the refinery operations and which declared bankruptcy in 2015. Limetree has entered into a terminal operating agreement with the VI Government that extends through January 4, 2041 with the option by the terminal owner to extend the agreement for another 15 years.

LB Terminals has repurposed the asset as a storage terminal, restarted storage tanks and entered into fee-based contracts. Currently there are no plans to restart the refinery operations and going forward it is expected the facility will be operated as a petroleum storage terminal.

Contracts are fixed rate storage contracts and customers pay for the capacity in the tank that they have reserved independent of actual usage. Additional revenues can be created through marine fees, blending or heating fees. LB Terminals is not directly exposed to commodity price volatility.

The principal methodology used in this rating was Generic Project Finance Methodology published in December 2010. Please see the Rating Methodologies 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 credit rating action on the support provider and in relation to each particular credit 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 credit rating action, and whose ratings may change as a result of this credit 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.

Kathrin Heitmann
Vice President - Senior Analyst
Project Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

A.J. Sabatelle
Associate Managing Director
Project Finance Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
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