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Rating Action:

Moody's assigns (P)Baa2 rating to Tengizchevroil Finance Company International Ltd.'s proposed bonds; stable outlook

Global Credit Research - 08 Jul 2016

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
No Related Data.
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