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Rating Action:

Moody's rates Gemini HDPE LLC's Senior Credit Facility Ba2; outlook stable

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.

RATINGS RATIONALE

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 rating.

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 film resins.

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 and ceramics.

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.

Sreedhar Kona
Vice President - Senior Analyst
Project Finance Group
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 Group
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 rates Gemini HDPE LLC's Senior Credit Facility Ba2; outlook stable
No Related Data.
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