London, 08 July 2016 -- Moody's Investors Service, ("Moody's") has
today assigned a provisional (P)Baa2 rating to the proposed $1
billion of senior secured bonds due 2026 (the Bonds) to be issued by Tengizchevroil
Finance Company International Ltd. (the Issuer). The outlook
is stable.
The Issuer is a special purpose company wholly owned by Tengizchevroil
LLP (TCO), the production licence holder of the Tengiz and Korolev
oil fields in western Kazakhstan. The Issuer was established to
raise debt and on-loan the proceeds to TCO to part fund a major
production capacity expansion (the Expansion Project).
Moody's assigns provisional ratings in advance of the final sale of securities
and these reflect Moody's credit opinion regarding the transaction only.
Upon closing of the transaction and a conclusive review of the final documentation,
Moody's will endeavour to assign a definitive rating to the Bonds.
Definitive ratings may differ from provisional ratings.
RATINGS RATIONALE
Moody's (P)Baa2 Senior Bonds rating reflects as strengths 1) TCO's
long-term project and license agreement with the Government of
Kazakhstan providing exclusive development rights until 2033, 2)
proven hydrocarbon reserves, during the remaining concession period,
of four billion barrels of oil (when the proposed capacity expansion is
included) at the Tengiz and Korolev fields, 3) TCO's track
record of high production levels and successful implementation of expansion
projects, 4) the importance of TCO as a key revenue contributor
to its shareholders, particularly Chevron Corporation (Chevron,
Aa2 stable) and the Government of Kazakhstan (Baa3 negative) and 5) a
cash call mechanism, which substantially mitigates key risks during
the period to first oil production from the future growth project (FGP).
These strengths are partly offset by 1) exposure to volatile commodity
prices, 2) exposure to potential negative government actions,
given the history of adverse, albeit relatively minor, intervention
by Kazakh government entities, 3) Kazakhstan's somewhat untested
and uncertain legal framework, 4) weak creditor protections relative
to many rated projects and 5) potential interruption to and/or increased
cost of transportation via the CPC pipeline and/or alternative routes
due to adverse geopolitical, technical or logistics events.
The $42.4 billion Expansion Project is very large and involves
relatively complex, albeit proven, processes. The size
and complexity of the project is exacerbated by the remote, inaccessible
and climatically hostile location of the facilities. TCO will need
to accommodate, at the peak, 10,000 workers at the site
and will also be reliant on the performance of third parties to complete
key elements of the work, including shipment of construction modules,
to meet construction schedules and/or summer shipping windows.
A cash call mechanism largely mitigates the risk of a funding shortfall
during the period to first oil from the FGP. TCO's Formation Agreement
requires the partners (guaranteed by Chevron, Mobil Corporation
(Aaa negative), the Government of Kazakhstan and Lukoil, PJSC
(Ba1 negative)) to make payments to TCO as required by TCO to meet cash
shortfalls in conducting its activities. Bondholders will not have
recourse to TCO's partners and so, TCO's decision to make a cash
call is normally at its sole discretion. However, in the
period before first oil from the FGP, if TCO forecasts that there
will be a cash shortfall in any immediately upcoming quarter, the
financing documentation requires TCO to make a cash call for that amount.
Failure by the partners to fund the cash call amount in full would be
an event of default under the financing.
To the extent that a material downside arises during the period prior
to first oil from the FGP, TCO would be reliant on cash payments
from the partners. The rating is not currently constrained by the
credit quality of any of the partner guarantors, as Moody's base
case does not include any cash calls from the partners. However,
if a downside occurred and Moody's revised base case forecasts included
material payments from cash calls, the rating agency may constrain
TCO's senior bond rating at the lowest rating of the three main partner
guarantors (Chevron, Mobil Corporation and the Government of Kazakhstan).
To part fund the Expansion Project capex, the Issuer plans to raise
up to $5.375 billion (including up to $1 billion
in the current offering) in the bond markets over a period of five years.
For each dollar of bond issuance, the Issuer will, at the
same time, borrow two dollars from affiliates of Chevron Overseas
Company and one dollar from affiliates of ExxonMobil Kazakhstan Ventures
Inc. The Issuer plans to borrow $16.125 billion in
pari passu partner loans, culminating in a total senior debt amount
of up to $21.5 billion. The balance of funding required
to meet Expansion Project capex ($20.9 billion, including
$3.3 billion spent prior to 2016) is expected to be funded
with internally generated cash.
TCO will likely require cash resources to cover liquidity requirements
in the periods between bond issuances. It may also require liquidity
to cover any delay in a bond issuance. As a result, the Issuer
has put in place a $3 billion commercial bank facility (with matching
pari passu partner loan facilities totalling $9 billion).
The total facilities of $12 billion are revolving in nature and
have a five year tenor. Up to $8 billion may be extended
for a sixth year and up to $4 billion for a seventh year.
Both extensions are at TCO's option.
Moody's expects that the commercial bank facility and matching partner
loan facilities will provide adequate liquidity during the period prior
to first oil from the FGP. Nonetheless, the revolving facilities,
together with the initial bond issuance and internally generated cashflows,
would not, on their own, be sufficient to meet TCO's cash
requirements prior to first oil from the FGP, so TCO will need to
raise the additional debt contemplated. Again, the cash call
mechanism mitigates the risk of TCO failing to do so.
TCO expects to transport most of its oil production via the CPC pipeline,
which is much more cost effective than alternative transportation routes.
Transportation costs would be significantly higher if TCO had to ship
substantial volumes of oil via non-CPC routes. Also,
the volumes that could be shipped via alternative routes would be limited
by route capacity, the availability of infrastructure and demand
from other shippers. Therefore, TCO is highly dependent on
uninterrupted access to the CPC pipeline. Moody's expects
that the CPC partners, of which TCO partners or affiliates represent
more than 50%, would act quickly to resolve any outages caused
by pipeline damage or technical failure. Also, the importance
of the project to the Government of Kazakhstan makes politically influenced
interruption unlikely. Notwithstanding the low risk of a substantial
unavailability event on the CPC pipeline, the impact of such an
event on TCO could be very significant.
Moody's considers that the project financing structure is weak,
with limited lender protections compared with most rated projects.
Bondholders will have no share security over TCO, nor security over
physical assets or material project contracts. Security will be
limited to oil sales proceeds (into an offshore secured account),
the DSRA and the proceeds of asset sales, catastrophic casualty
and expropriation compensation. Senior lenders have no ability
to step in and limited enforcement rights. Events of default are
limited and do not include a financial metric covenant.
Through its 50% ownership, TCO is one of Chevron's most important
upstream assets. Chevron provides invaluable expertise and experience
from the wider group, to support and influence the direction and
operation of TCO. Chevron's influence and oversight of TCO's operations
is a credit positive. Moody's also recognises the importance
of TCO to Chevron. As a result, the rating agency expects
that Chevron would be highly motivated to support TCO, if required.
The (P)Baa2 rating incorporates the benefit of the combined support from
TCO's partners, particularly Chevron and the Government of Kazakhstan.
The TCO shareholders comprise i) Chevron Overseas Company (50%),
an indirect subsidiary of Chevron Corporation, ii) ExxonMobil Kazakhstan
Ventures Inc (25%), an indirect subsidiary of Exxon Mobil
Corporation (Aaa negative), iii) KazMunayGas NC JSC (Baa3 negative)
(20%), Kazakhstan's national oil company and iv) Lukarco
B.V. (5%), a subsidiary of Lukoil, PJSC.
RATIONALE FOR STABLE OUTLOOK
The stable outlook reflects Moody's expectation that TCO will successfully
complete the capacity expansion projects within budget and schedule and
that the cash call mechanism will protect TCO against cash flow downsides
during the period until first oil from the FGP.
WHAT COULD CHANGE THE RATING UP/DOWN
An upgrade of the rating is not currently envisaged. The rating
is not directly linked to the issuer rating of the Government of Kazakhstan
and so an upgrade of the sovereign rating would not automatically be followed
by an upgrade of TCO's rating.
Downward rating pressure would result from 1) a downgrade of the Government
of Kazakhstan's issuer rating, particularly if combined with an
expectation that cash calls may be required, 2) an expectation that
first oil from the FGP will be delayed by more than one year from the
June 2022 target, 3) a reduction in our assumption of support from
Chevron or the Government of Kazakhstan, 4) a significant interruption
to TCO's access to the CPC pipeline or 5) low oil prices or poor operational
performance resulting in a revised Moody's forecast minimum debt service
coverage ratio (DSCR) below 1.5x.
PRINCIPAL METHODOLOGY
The principal methodology used in this rating was Generic Project Finance
Methodology published in December 2010. Please see the Ratings
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.
Tomas O'Loughlin
VP - Senior Credit Officer
Infrastructure Finance Group
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Douglas Segars
Associate Managing Director
Infrastructure Finance Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Releasing Office:
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Moody's assigns (P)Baa2 rating to Tengizchevroil Finance Company International Ltd.'s proposed bonds; stable outlook
