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10 Jul 2014
Approximately $420 million of Credit Facilities affected
New York, July 10, 2014 -- Moody's Investors Service, ("Moody's") has
assigned a Ba2 rating to Gemini HDPE LLC's ("Project Gemini"
or "Gemini") senior secured credit facilities consisting of
a $420 million 7-year Senior Secured Construction/Term Loan
B due July 2021. Project Gemini's outlook is stable.
The Ba2 rating mainly reflects the Completion Agreements and Tolling Guarantees
(together, the "Guarantees") from each of INEOS Group
Holdings S.A. ("INEOS": B1, Stable)
and Sasol Financing (Pty.) Ltd. ("Sasol Financing"),
a subsidiary of Sasol Limited ("Sasol": Baa1,
Stable), balanced against the high susceptibility of the project's
standalone merchant economics to high-density polyethylene (HDPE)
margin volatility. While the guarantee from a subsidiary of Sasol
Limited, an investment grade rated credit, considerably mitigates
the project risk, the several-but-not-joint
nature of the guarantees and INEOS' B1 rating limit the extent to
which the risk is mitigated. Moreover, while the joint venture
will be equally owned, INEOS' role in the project is substantial
both from an operational and technology perspective. We also observe
that the Gemini project is 50% larger than the largest existing
plant using Innovene-S technology and as such, uncertainty
exists with regards to Sasol's willingness and/or capability to
operate the Innovene-S technology in the event of an INEOS'
default. That said, we recognize the strength of the Tolling
Agreement and the Guarantees, which together provide significant
cash flow predictability.
The Ba2 rating further recognizes INEOS' and Sasol's experience
building and operating petrochemical manufacturing facilities around the
world and the $40 million contingency that is built into the construction
budget, albeit the proposed EPC contract is structured on a cost-reimbursable
basis. Additionally, the project benefits from the Guarantees,
and also from the 42 month Date Certain provision for the completion of
construction. Failure to satisfy the Date Certain provision will
be deemed an event of default under the Credit Agreement. We believe
that the completion risk is at its highest 7 quarters into the construction
phase, when proceeds of the entire $420 million credit facility
would have been spent against approximately $76 million of equity
contributions. However, Moody's views both INEOS and
Sasol Financing short to medium term liquidity situation as satisfactory
and captured in the Ba2 rating assignment.
The strength of the Tolling Agreement is a significantly credit positive
factor influencing the Ba2 assessment of the project. INEOS Gemini
HDPE Holding Company LLC ("INEOS HoldCo") and Sasol Chemicals
North America LLC ("Sasol CNA", and together with INEOS HoldCo,
the "Members") individually assume all obligations under the
Tolling Agreement as independent contractors. The Tolling Agreement
is effective from the closing of the project's financing and the
performance and payment obligations under Tolling Agreement are guaranteed
by INEOS and Sasol Financing (collectively, the "Guarantors")
on a several but not joint basis. The Tolling Agreement is designed
such that each Member is responsible to supply half of the raw material
(ethylene and 1-hexene) and each Member will receive half of the
production output. The toll provides for adjustments in the event
that either Member elects not to supply its share of raw material.
The right to off-take product is a function of the Member's
supply of raw material.
The toll fee will be charged to the Members on a monthly basis.
As discussed, the toll fee is designed to cover all costs of operating
and maintaining the plant including fixed and variable manufacturing costs,
sustaining capital cost and debt service. The toll fee payment
obligation is absolute and unconditional and not subject to abatement
or set-off. Failure to cure the payment default events as
described in Section 10 of the Tolling Agreement will result in a default
under the Credit Agreement, hence resulting in acceleration of the
entire debt outstanding. Given the Amortization Schedule in the
Tolling Agreement and the unconditional nature of the Tolling Agreement
obligations, the project is required to meet its debt service obligations
regardless of the completion of construction.
The project benefits from its locational advantage with direct access
to ethylene produced from low-cost shale gas feedstock supply via
five shale-gas based producer pipelines -- INEOS, Lyondell
North, Lyondell South, Shell and Flint Hills. Furthermore,
as NGL infrastructure expands, ethane supplies from other shale
regions are moving towards the US Gulf Coast. Currently INEOS'
Chocolate Bayou facility produces all of the ethylene required to supply
for INEOS' share of the Gemini project. Sasol's existing
Lake Charles ethylene cracker produces part of Sasol CNA's share
for the Gemini project and Sasol CNA will acquire the rest from the market.
However, once Sasol's Lake Charles build out is complete (18-24
months after COD of Gemini), Sasol anticipates it will have more
than the required ethylene to supply for Gemini's off-take.
By integrating into the INEOS' Battleground Manufacturing Complex
(BMC complex), the project benefits from shared fixed costs between
the existing facilities and the plant through increased management oversight,
a reduced implementation timeline, and access to experienced and
trained employees. The plant employs INEOS as both the operator
and the provider of its proprietary Innovene-S technology,
which is used globally by over 10 global chemical companies. As
the largest global operator, INEOS has significant expertise operating
assets with the Innovene-S technology. However, INEOS'
deep expertise, its role in the project and its proprietary technology
pose an increased risk to investors in the event of an INEOS' default.
The uncertainty around Sasol's willingness -- vis-à-vis
it's focus on the Lake Charles facility -- to step in for INEOS'
50% obligations under the Tolling Agreement and Sasol's capability
to run a seamless operation in the absence of INEOS are factors that weigh
on the rating outcome.
The loan terms do not provide for traditional project finance features
such as Debt Service Reserve Account (DSRA), Maintenance Reserve
Account and excess cash flow sweep. However, the terms of
the Tolling Agreement partially mitigate this structural weakness as all
of the project costs are borne by the Members. The Debt Component
of the Toll Fee amortizes 1% of the principal per year through
2017 and, 13.29% of the principal per annum until
the maturity of the loan, amortizing 50% of the principal
through the tenor of the loan. However, the absence of DSRA
means that the project has no liquidity cushion and instead has to rely
on the corporate guarantees for incremental liquidity. That said,
under the loan documents, 100% of the proceeds from any new
debt issuances, subject to certain customary baskets, are
to be applied as mandatory prepayments towards the current credit facility,
thereby mitigating the risk of additional debt incurrence.
The breakeven analysis on the project's merchant economics demonstrates
the project's low level of tolerance to HDPE margin volatility.
Our breakeven analysis is defined as the contribution margin required
to cover the project's Toll Fee and other extraneous costs borne
by the Members in relation to the project. The project breaks even
with just a 10% reduction in the HDPE margin. Although the
trend analysis of 35 year historical HDPE margin data indicates a low
likelihood of HDPE margin shrinkage, the sustainability of the project
as a standalone entity remains uncertain. In the end, the
performance of the Members to honor their obligations under the Tolling
Agreement remains very critical to the credit quality of the project and
hence their respective credit ratings have a bearing on Gemini's
The stable outlook incorporates our view that Gemini is a strategically
important project for both INEOS and Sasol, that construction risk
is manageable and that once operational, the Members will honor
their obligations under the Tolling Agreements.
Gemini is unlikely to be upgraded in the near term given its construction
period. Over the longer term, positive trends that could
positively influence the rating include having successful on-time
and within-budget construction completion, strong operational
performance and sustained strong HDPE margins. Importantly,
measurable improvement in the creditworthiness of the Sponsors could also
lead to Gemini's rating upgrade.
The rating could face downward pressure if Gemini experiences construction
delays and/or budget overruns. Additionally, rating downgrades
of Gemini's Guarantors could potentially lead to downward pressure
on Gemini's rating.
Moody's rating is based upon our current understanding of the proposed
terms and conditions of the transaction and is subject to our receipt
and review of final documentation being consistent with the proposed terms.
The principal methodology used in this rating 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.
The Gemini project is a wholly-owned subsidiary of INEOS HoldCo,
a subsidiary of INEOS, and Sasol CNA, an indirect subsidiary
of Sasol Limited. The project is a High-Density Polyethylene
(HDPE) manufacturing plant to be constructed and funded through a 50/50
joint venture between INEOS HoldCo and Sasol CNA at INEOS' Battleground
Manufacturing Complex in La Porte, TX. INEOS and Sasol will
together act as the Sponsors for the project. The project will
be capable of producing 470 kilo tons annually (kta), (or 1 billion
pounds of HDPE per year) using INEOS Innovene-S technology.
The project will have the capability to produce a range of HDPE products,
but will focus on premium high-growth bimodal pipe and bimodal
INEOS is the 3rd largest global chemical company by 2013 sales.
INEOS consists mainly of three divisions -- Olefins & Polyolefins
North America, Olefins & Polyolefins Europe and Chemical Intermediaries.
INEOS is headquartered in Switzerland, with 7000 employees globally.
It has 28 production sites in 8 countries. INEOS' Olefins
& Polyolefins North America is organized as INEOS USA LLC and is INEOS'
fastest growing business segment with 2012 sales of $4.7
billion and EBITDA of $1.2 billion. INEOS USA LLC
is headquartered in League City, TX with approximately 1000 employees.
Sasol Limited (Sasol: Baa1 stable) is an international integrated
energy and chemicals company headquartered in Johannesburg, South
Africa. Sasol Limited is one of the world's largest producers
of synfuels, adding value to coal, natural gas and oil,
to produce higher value liquid fuels. Sasol has operations in 37
countries and employs over 34000 people. Sasol Limited is listed
on NYSE as well as Johannesburg, with a market capitalization of
$32 billion. Sasol Limited is both operationally and geographically
diversified, with 12 business divisions, although approximately
49% of revenue and 86% of profit from operations is generated
in South Africa. For the Last Twelve Months ended 31 December 2013
Sasol Limited generated revenue of ZAR199.7 billion (USD20.7
billion) and EBITDA of ZAR79.1 billion (USD8.2 billion).
Sasol currently operates a large production complex in Lake Charles,
La that includes an ethylene cracker. The company also has operations
in Arizona, California, Oklahoma, Pennsylvania and Texas.
The company's U.S. operations employ approximately
850 people and manufacture the primary ingredients in detergents,
personal care products, waxes, catalysts, thickeners
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
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
Please see the ratings tab on the issuer/entity page on www.moodys.com
for additional regulatory disclosures for each credit rating.
Vice President - Senior Analyst
Project Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
Chee Mee Hu
MD - Project Finance
Project Finance Group
Moody's rates Gemini HDPE LLC's Senior Credit Facility Ba2; outlook stable
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
No Related Data.
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