Rating Action Overview

• We see increasing costs of borrowing and refinancing risks for the North Queensland Export Terminal Pty Ltd. (NQXT) project. Consequently, the minimum DSCR has decreased to below our previous threshold of 1.60x.
• Liquidity remains less than adequate, given the terminal's next bullet maturity of US$140 million is due on Sept. 22, 2021.
• On March 21, 2012, S&P Global Ratings lowered its issue credit rating on NQXT's debt to 'BB-' from 'BB+'.
• The negative outlook continues to reflect increasing uncertainty as to the nature and timing of future refinancing plans as well as borrowing costs. The company has indicated it will borrow additional shareholder loans by end-April 2021 to meet the upcoming maturity due in September 2021.

Project Description And Key Credit Factors

Abbot Point Coal Terminal, located 25km northwest of Bowen in the Australian state of Queensland, is Australia's northernmost coal port. The multiuser port has a design capacity of 50 million tons per annum (mtpa) that is substantially contracted under medium-to-long term take-or-pay agreements. The port is held under a 99-year lease acquired by the Adani Group from the Queensland government early in 2011.

The port was renamed North Queensland Export Terminal (NQXT) from Adani Abbot Point Terminal in October 2020. The port has also incorporated a new entity, NQXT Capital Pty Ltd., which will be the pass-through special-purpose financing vehicle for the project for future refinancing.

Strengths

• Relatively stable revenue under take-or-pay contracts and socialization arrangement at the time of resets.
• Good contracted capacity pipeline from multiple shippers.

Risks

• Exposure to refinancing risk given increasing reluctance of capital providers to finance coal-related assets.
• Some headline environmental, social, and governance (ESG) risk given linkages to the Carmichael Mine as one of the users.
• Periodic exposure to contract renewals.
• Revision of tariffs at next reset in June 2022.

Rating Action Rationale

We have lowered the rating on NQXT to reflect the increasing refinancing risks associated with the project, difficulty in accessing markets, and potentially higher borrowing costs for the project.

Near-term liquidity risks remain as we believe the refinancing of the upcoming maturity is not going to proceed. Consequently, NQXT is seeking additional shareholder borrowings by April 30, 2021, to meet the upcoming September 2021 maturity.

Beyond the imminent liquidity risks, we believe that the refinancing risks and borrowing costs associated with the project have increased. The credit margin for refinancing remain uncertain as the project has been unable to attract financing for its last two maturities (A$270 million); instead having to turn to is ultimate parent to provide shareholder loans. Our current base-case forecast assumes the project will continue to bear risk associated with increased borrowing costs, as the current tariff mechanism doesn't pass this through to users. We believe widening of credit margins could remain a persistent feature for future refinancing, owing to ESG-related considerations over coal assets in general as well as this project itself.

This remains a risk given the substantial upcoming maturity of US$500 million due in December 2022. Delayed refinancing for subsequent maturities may put further downward pressure on the ratings.

We have assumed refinance margins of 6% and 7.5% in our base and downside case assessment, leading to debt service coverage ratios (DSCRs) of 1.56x and 1.07x, respectively. The combination of this leads to a two-notch downgrade.

NQXT's long-term capital structure remains under development. Of the shareholder loans taken so far, the company has converted A$198 million into equity (units of the NQXT Holdings Trust), including an additional A$98 million borrowed to meet its legal liabilities arising out of the August 2020 Queensland Supreme Court decision. Currently our assessment factors in A$1.34 billion as senior debt. In addition, the company is considering an amortization structure for its senior debt, which NQXT has stated it intends to put in place in the next two-three months. Clarity on the long-term debt profile would also be an important input for the future credit profile.

Timely completion of the next tariff reset, including arbitrations if any, as well as conclusions of the ongoing renewal of Glencore contract would be relevant credit factors in the next term.

Environmental, social, and governance (ESG) credit factors for this credit rating change:

• Greenhouse gas emissions,
• Other environmental factors, and
• Other governance factors.

Outlook

The negative outlook continues to reflect NQXT's increasing refinancing risk and borrowing costs. As NQXT has not yet refinanced the upcoming maturity, the company has indicated it will borrow additional shareholder loans by end-April 2021 to meet the upcoming maturity in September 2021. As such, the outlook also captures the uncertainty as to the nature and timing of future refinancing.

Downside scenario

We may lower the rating if the funding for the September 2021 debt maturity is not received in NQXT's account by April 30, 2021, and continued uncertainty remains around the 2022 refinancing. We could also lower the ratings if our calculated minimum DSCR was to drop below 1.4x, which could most likely happen if there is a further increase in borrowing costs beyond that factored into our base case. Further, uncertainty around the timing of resolution of handling charges, contract renewals, or any other operational challenges can also weigh on the rating.

Upside scenario

We could revise the outlook to stable if the company receives funds for the September 2021 maturity and there is greater certainty over the long-term debt profile for the business. A precursor to a revision in the outlook would also include DSCRs remaining above 1.4x in our base case and 1x in our downside case assessment.

Base Case

Assumptions

• Contracted tonnage profile assumes contracts are consummated as scheduled, before the next reset in 2022, and no unanticipated contract termination will occur until the next reset in 2022. Thereafter, we assume NQXT to be contracted for about 39.5-43 mtpa.
• Tariff charges reflecting current settlement agreements until the upcoming reset.
• Operations and maintenance costs passed through to users, however 50% disputed handling costs by four users expected to be held back for another two years;
• Long-term lifecycle costs of about A$2.5 million (revised from previous assumption of A$2 million) per quarter, funded from cash flow and ultimately passed through to shippers;
• The shareholder loan to be a temporary feature in NQXT's capital structure, and hence, we continue to assume it as senior debt-like.
• Future refinancing margins of 600 basis points over base rates; and
• Cash sweep will commence in 2034 such that the senior debt is fully repaid over the next 10 years, well before the end of the current S&P Global Ratings' project assessment period in 2050. This is substantially shorter than the project's most recent assessment of the volume-weighted mine life, which currently extends out to 2077. The assumptions on the concession expiration and the beginning of the cash flow sweep do not affect our view of the outcome since the DSCR calculations are interest-only, with amortization thereby not affecting the ratios.

Key metrics

• Minimum DSCR over the life of the project of 1.56x; and
• Average DSCR of about 1.69x over the current projection period to 2034 (referenced to the beginning of the cash flow sweep period).

Downside Case

Assumptions

• Revenue decreased by 15% throughout the concession period, with NQXT supporting the revenue loss before socialization applies;
• Operations, maintenance, and lifecycle cost pass-through maintained, except the amount withheld similar to base case;
• Refinancing margin increased by 150 basis points compared with our base case; and
• Senior debt cash sweep commences in 2023 such that debt is fully repaid at least three years before the end of assumed mine-life.

Key metrics

• Minimum DSCR over the projection period is 1.07x; and
• The average DSCR is not meaningful because DSCRs increase rapidly as debt is paid down from assumed cash sweeps.

Liquidity

NQXT's available liquidity to refinance the US$140 million debt maturity due in September 2021 is less than 1x over the next 12 months, indicating less than adequate liquidity.

Recovery Analysis

Our recovery analysis for NQXT contemplates a hypothetical simulated default during the mid-2025. The recovery rating on senior debt issues of NQXT is '2'. This reflects our expectation of a substantial recovery (70%-90%, rounded estimate 75%) should a default event occur.

• At the time of hypothetical default, we assumed that adverse macroeconomic conditions or factors specific to this project cause an inability to arrange for timely refinancing, leading to a default on NQXT's bullet maturity. Post default we assume stress on the revenues and operating costs at similar levels to our downside analysis.
• We value the company as a going concern because we believe that following a payment default, the company is likely to be reorganized due to the longer-term value in its established contracts. We have applied a discounted cash flow approach to arrive at the projects value and adjusted that for administrative costs.

Simulated default assumptions:

• Simulated year of default: 2025
• We discount cash flows at 13% through the remaining life of the assets (captures the expected higher cost of funds)

Simplified waterfall

• Net enterprise value at emergence (after 5% administrative costs): A$1,053.1 million
• Estimated senior secured debt outstanding (including six months prepetition interest): approximately A$1,340.0 million
• ---Recovery expectations: lower half of 70%-90% (rounded estimate 75%).

Rating Score Snapshot

Operations phase SACP (Senior Debt)

• Operations phase business assessment: 5 (1=best 12=worst)
• Preliminary SACP: bbb-
• Downside impact on preliminary SACP: bbb (no impact)
• Project Asset Coverage: Negative (-2 notch)
• Liquidity: Less than adequate (no impact, capped at bb+)
• Comparative analysis assessment: Negative (-1 notch)
• Adjusted preliminary operations phase SACP: bb-
• Operations counterparty ratings adjustment: N/A
• Financial counterparty ratings adjustment: N/A
• Operations phase SACP: bb-

Modifiers (Senior Debt)

• Parent linkage: Delinked
• Structural protection: Neutral (no impact)
• Senior debt issue rating: BB-

Related Criteria

• Criteria | Structured Finance | General: Counterparty Risk Framework: Methodology And Assumptions, March 8, 2019
• Criteria | Corporates | Project Finance: Project Finance Operations Methodology, Sept. 16, 2014
• Criteria | Corporates | Project Finance: Project Finance Framework Methodology, Sept. 16, 2014
• Criteria | Corporates | Project Finance: Project Finance Transaction Structure Methodology, Sept. 16, 2014
• General Criteria: Country Risk Assessment Methodology And Assumptions, Nov. 19, 2013
• Criteria | Corporates | Project Finance: Project Finance Construction And Operations Counterparty Methodology, Dec. 20, 2011
• General Criteria: Principles Of Credit Ratings, Feb. 16, 2011

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