Monday 10, July 2017 by Georgina Enzer

Moody's changes ratings outlook of Qatari project finance issuers to negative; affirms ratings

Moody's Investors Service, ("Moody's") has affirmed the A1 guaranteed senior secured debt ratings of Ras Laffan Liquefied Natural Gas Co.Ltd (II) (RasGas II) and Ras Laffan Liquefied Natural Gas Co.Ltd (3) (RasGas 3), together RasGas II-3.

Moody's has also affirmed the A1 senior secured debt rating and the A2 senior subordinated debt rating of Nakilat Inc. (Nakilat). The outlook on these issuers has been changed to negative, from stable.

RATINGS RATIONALE

Today's rating actions on RasGas II, RasGas 3 and Nakilat follow Moody's 4 July affirmation of the Aa3 government bond and issuer ratings of Qatar, and change in outlook to negative, from stable. The negative outlook on Qatar was driven by the economic and financial risks arising from the ongoing dispute between Qatar and a group of countries, including its fellow Gulf Cooperation Council (GCC) neighbours Bahrain (Ba2 negative), Saudi Arabia (A1 stable) and the United Arab Emirates (UAE, Aa2 stable). In Moody's view, the likelihood of a prolonged period of uncertainty extending into 2018 has increased and a quick resolution of the conflict is unlikely over the next few months, which carries the risk that Qatar's sovereign credit fundamentals could be negatively affected. For additional information, please refer to the related Qatar announcement.

The rating actions on RasGas II, RasGas 3 and Nakilat reflect that each is a government related issuer (GRI) and that the ratings benefit from Moody's assumption of extraordinary support, if required, from the Government of Qatar to avoid a default on their debt obligations, which leads to a significant uplift from the standalone credit strength, or baseline credit assessment (BCA), of the projects.

The BCA for RasGas II-3 is unchanged, and lies within a range of baa1-baa3. The diplomatic dispute has not materially impacted RasGas II-3's ability to deliver liquefied natural gas (LNG) to their customers, and Moody's does not expect it to do so going forward. The rating agency considers that a disruption of Qatari LNG vessels' ability to transit the Strait of Hormuz is very unlikely. Qatar can currently export LNG through the Strait without entering UAE or Saudi Arabia territorial waters. Even if Oman joined the Saudi led action, it is expected that Qatar's LNG vessels would be able to transit the Strait via Iranian waters.

More generally, while Moody's understand that RasGas II-3's operations have not been materially impacted by the dispute, operating and transportation costs could be adversely impacted by a protraction or escalation of the dispute.

The BCA for RasGas II-3 also reflects (1) the project's compelling commercial and industrial rationale, and the strong competitive position that it enjoys as a world class, low-cost producer of LNG and valuable by-products, (2) its generally beneficial project finance structural features, subject to the absence of certain security interests and subject to limitations on the likely effectiveness of certain creditor projections, (3) event risk considerations, including asset-concentration risk and geopolitical risk and (4) the project's exposure to commodity price risk, although such risks are substantially mitigated by its very strong financial metrics.

The a3 BCA for Nakilat is also unchanged and reflects Moody's expectation that the availability based nature of revenues generated under its charter agreements would insulate Nakilat, contractually, in most scenarios of disruption caused by the diplomatic dispute.

The BCA for Nakilat also reflects (1) the critical importance of its vessels to their liquefaction company charterers, (2) high quality net cash flows, underpinned by charter payments that are highly resilient and well-matched to operating costs and debt service costs, (3) financial metrics capable of supporting long tenor project finance debt (4) generally beneficial project finance structural features, (5) certain event risk considerations including exposure to force majeure risks potentially affecting the vessels and (6) exposure to refinancing risk arising from the bullet maturities of certain programme debt facilities, within the term of the financing.

WHAT COULD CHANGE THE RATINGS UP/DOWN

  • Moody's could upgrade the ratings if the sovereign rating of the Government of Qatar was upgraded.
  • Moody's could downgrade the ratings if the sovereign rating of the Government of Qatar was downgraded.
  • Moody's could also downgrade the ratings if its assumption of high support weakens.

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