Rating Action: Moody’s upgrades Cheniere Corpus Christi Holdings to Baa3; outlook is stable
New York, August 03, 2020 — Moody’s Investors Service upgrades Cheniere Corpus Christi Holdings, LLC’s (CCH) senior secured global notes to Baa3 from Ba1. Concurrent with the upgrade, the rating outlook is changed to stable from positive.
The rating upgrade to Baa3 reflects the near completion of construction activities at Corpus Christi Liquefaction, LLC (CCL), a three train 15 million ton per annum (MTPA) liquid natural gas (LNG) liquefaction facility, the demonstrated sustained, steady operating performance at CCL, and robust cash flows derived under seven 20-year Sale and Purchase Agreements (SPA) whose terms commenced in June 2019 for two of the SPAs and in May 2020 for the remaining five. Collectively, the seven SPA’s will provide annual recurring fixed fees of approximately $1.4 billion over a multi-year period providing a strong underpinning for the project’s investment grade credit profile.
The upgrade acknowledges the recent repayment of convertible debt within the consolidated capital structure, including the repayment of $1.6 billion of convertible debt at CCH Holdco II LLC, an affiliate of CCH (the EIG Notes), funded by a borrowing at Cheniere Energy, Inc. (CEI), CCH’s parent. While the convertible note repayment was funded in a non-credit accretive way, addressing the EIG Notes satisfies an overhang issue for CCH’s credit profile.
The rating however is constrained by CCH’s significant leverage profile that is expected to remain in excess of $10 billion as free cash flow generated over the near-term is used to fund remaining construction costs at CCL and to retire holding company debt within CEI’s corporate structure. CCH and CCL are wholly-owned subsidiaries of CEI.
Construction of CCL Train 3 was approximately 84% complete as of March 31, 2020 with substantial completion anticipated in the first half of 2021. Remaining construction and owners costs are approximately $600 million and will be funded with free cash flow generated from Trains 1-2 and, if needed, equity contributed by CEI whose remaining equity commitment of approximately $350 million is supported by a letter of credit.
The upgrade recognizes the demonstrated track record of CEI and its EPC contractor as collectively both parties have constructed and achieved commercial operations for seven LNG trains, including five trains at its affiliate Sabine Pass Liquefaction, LLC (Sabine Pass: Baa3, stable). CEI has successfully procured natural gas and loaded more than 1,100 LNG cargoes for export, reducing concerns around the company’s ability to ramp-up the commercialization of Train 3 and to maintain safe operations. While Covid-19 related construction risks remain, this risk is largely mitigated by the percentage of construction completed, the low supply chain risk as the majority of the equipment and materials have been delivered to the site, and by the significant cushion that exists between the 2021 expected substantial completion date for Train 3 and the Guaranteed Substantial Completion Date under the EPC contract.
Incremental revenue from an eighth SPA with an unrated global commodities entity is tied to the commercialization of Train 3. The scheduled start date for a ninth SPA with PetroChina Company Ltd. is 2023. CCH’s annual fixed fees for Train 1-3 is approximately $1.8 billion. The current average weighted credit profile of CCH’s nine contractual customers is in the mid-Baa rating range, an important rating consideration and a potential rating constraint.
The rating upgrade considers the current reduced global demand for LNG owing to a combination of weak worldwide economic activity resulting from measures to contain the outbreak of Covid-19 and high storage inventory levels. As a result, there has been an increase in cargo cancellation notices from CCL’s customers. Cargo cancellation notices are allowed as each SPA provides the customer with an option to elect to cancel cargoes within a predetermined advance notice period. In the case of a cargo cancellation, the cash flow effect is minimal because the customer is still required to pay the fixed fee with respect to the contracted volumes that are not delivered. To date, all counterparties that have provided a cargo cancellation notice have paid their required fixed fee. The Baa3 rating assumes that the contractual terms will continue to be honored and that the fixed fees will continue to be paid regardless of any future cargo cancellations that may occur. Because the required notice period for any cargo cancellation gives CEI ample time to respond, and coupled with its natural gas procurement strategy and sizeable scope, CEI has been able to manage CCL’s gas procurement responsibilities with no meaningful economic loss.
We currently forecast CCH to generate EBITDA of approximately $750 million in 2020 and in excess of $1.0 billion in 2021 and annually thereafter. Furthermore, we estimate annual interest costs at $500 million annually. With the majority of CCH’s capital structure consisting of non-amortizing bonds with the exception of a term loan facility with modest amortization requirements beginning 2022 and two series of fully amortizing notes totaling about $1.2 billion with annual amortization requirements beginning 2027, CCH should generate significant free cash flow over the next several years.
We anticipate CCH’s free cash flow to be used in 2020 and 2021 to fund any remaining construction costs and to retire debt at CEI. As referenced, CEI recently borrowed a portion of its approximately $2.7 billion term loan to repay convertible debt within its consolidated capital structure, including $1.6 billion to repay the EIG Notes. The decision to repay the EIG Notes with holding company debt was a credit negative consideration as we had expected the EIG Notes to be satisfied with CEI equity. We recognize, however, that the repayment of the EIG Notes addresses our previous concerns around the EIG Notes potentially needing to be refinanced with incremental CCH debt, and we acknowledge ring fencing measures that provide a degree of credit insulation between CCH and CEI.
Use of CCH’s free cash flow beyond 2021 is dependent upon several factors, including an ability to commercialize Corpus Christi Stage 3, a 10 MTPA expansion project involving seven midscale liquefaction trains. CEI’s policy relating to any expansion requires a number of conditions being satisfied before a Final Investment Decision (FID) can be reached. These FID conditions include a high degree of long-term contracts to support the investment, a lump sum turn key construction contract, and no greater than 50% debt financing. The ability to consummate new long-term contracts in the current market has material and multi-dimensioned challenges making the near-term viability of any expansion project uncertain.
While the current scheduled debt amortization within CCH’s capital structure is modest, its bond indenture requires CCH when issuing Replacement Senior Debt to demonstrate a Fixed Projected Debt Service Coverage Ratio (Fixed Projected DSCR) of at least 1.4x annually while amortizing all senior debt to zero over the remaining life of the SPA’s. The Fixed Projected DSCR is calculated using contracted cash flows only and is measured when CCH issues Replacement Senior Debt. This provision serves to require CCH to reduce operating company indebtedness and supports the maintenance of an investment grade profile as it effectively means that the project must always have sufficient remaining contracted revenues over the contract life to repay all of its existing debt and related interest expense at a 1.4x Fixed Projected DSCR.
CCH’s senior secured bonds are guaranteed by CCL, which owns and operates the Corpus Christi Liquefaction facility and Cheniere Corpus Christi Pipeline, L.P (CCPL) and Corpus Christi Pipeline GP, LLC (CCP GP). Collectively, CCPL and CCP GP own and operate the Corpus Christi Pipeline. Substantially all of the assets and equity interests of CCH, CCL, CCPL and CCP GP have been pledged to bank and bond lenders.
RATING OUTLOOK
The stable outlook is supported by an expectation that CCH’s near-term cash flow will be sufficient to cover remaining construction cost and that Train 3 achieves substantial completion in the first half of 2021.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
What could change the rating up
Material consolidated debt reduction or stronger than expected sustained cash flow such that project cash from operations to adjusted debt exceeds 15% on a recurring basis.
What could change the rating down
Unexpected delays or significant cost overruns relating to the remaining construction of Train 3, material deterioration in the credit profiles of its contractual offtakers or failure to generate the expected level of cash flow owing to operating related issues.
The principal methodology used in these ratings was Generic Project Finance Methodology published in November 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1194215. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.
REGULATORY DISCLOSURES
For further specification of Moody’s key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody’s Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
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The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.
These ratings are solicited. Please refer to Moody’s Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.
Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.
Moody’s general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.
The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody’s affiliates outside the EU and is endorsed by Moody’s Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody’s office that issued the credit rating is available on www.moodys.com.
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Scott Solomon VP - Senior Credit Officer Project Finance Group Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 A.J. Sabatelle Associate Managing Director Project Finance Group JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Releasing Office: Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653
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