Rating Action Overview

• On Dec. 14, 2022, S&P Global Ratings published its revised criteria for rating project finance transactions--"General Project Finance Rating Methodology" and "Sector-Specific Project Finance Rating Methodology". We then placed the ratings on North Queensland Export Terminal Pty Ltd.'s (NQXT) issues under criteria observation (UCO).
• We have completed our review of the Australia-based coal port. Therefore, on Jan. 30, 2023, we affirmed our 'BB-' long-term issue rating on NQXT's senior debt and removed it from UCO.
• The stable outlook reflects predictability of NQXT's cash flows and our expectations that the project will prudently manage contract renewals and tariff negotiations.

Project Description And Key Credit Factors

NQXT, located 25 kilometers 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). About 70% of this capacity is 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 in early 2011.

Strengths

• Stable revenue under take-or-pay contracts and socialization arrangements based on five-year tariffs.
• Contracted capacity from multiple shippers until 2028.
• Strong quality and competitiveness of coal from the Queensland basin.

Risks

• Permitted additional indebtedness, leading to refinancing risk and dependence on cash sweeps.
• Periodic exposure to contract renewals.
• Some headline environmental, social, and governance risk given linkages to the Carmichael mine as one of the users.

Rating Action Rationale

We affirmed our 'BB-' issue rating on the senior debt at NQXT following the revision to our criteria for rating project finance issuances.

The action factors in our revision in debt-service coverage ratio (DSCR) metric thresholds under the new criteria. NQXT's minimum base case DSCR of 1.59x remains in the 'bbb' category. We continue to assess the preliminary stand-alone credit profile (SACP) at 'bbb-', given risks associated with the project being in the coal sector.

Furthermore, although the median DSCR maps to a higher rating category, we do not apply any positive adjustment. This is given that DSCRs are interest-only, and debt amortizes based on mine-life-linked cash sweeps. Consequently, there is no change in our rating outcome of 'BB-' after factoring in adjustment for no fixed maturity date for final debt amortization and our view on the medium- to long-term prospects for the coal industry.

We have not revised our approach to the base case or resiliency assessment (previously referred to as downside assessment). We continue to assess all past and current shareholder loans as debt. This is given that the current senior debt documentation allows for refinancing or raising external debt up to the original A$1.2 billion.

Over the next two to three years, NQXT's long-term capital structure plans, customer profile along with the re-contracting profile and tariff reset, will determine the rating trajectory. Timely refinancing of future debt maturities also remains a key issue.

Outlook

The stable rating outlook on NQXT's senior debt reflects our view of the stability and predictability of the project's cash flows. We expect NQXT to prudently manage its contract renewals and tariff negotiations. The project's minimum DSCR will likely remain at about 1.59x while no debt amortization occurs.

Downside scenario

We may lower the rating if our forecast base case minimum DSCR dips below 1.3x or if we believe that business risks associated with the project have increased.

This could occur if:

• there is uncertainty around contracted tariffs or volume, or a material change in the nature of contracts;
• we believe a shipper or some shippers can't be easily replaced;
• the company's borrowing costs increase;
• the amortization profile changes materially;
• NQXT fails to appropriately manage refinancing of its bullet maturities well ahead of time; or
• the company faces any other operational challenges.

Upside scenario

We could raise the rating if NQXT's capital structure changes, such as through conversion of shareholder loans to equity, with no ability to subsequently draw down a corresponding amount as senior debt. Clarity around the contracted tariff, and improvement in our forecast minimum DSCR to well above 1.6x or in resiliency levels could also lead to a higher rating.

Rating Score Snapshot

Operations phase SACP (senior debt)

• Asset class operating stability: 3
• Operations phase business assessment: 5

Preliminary operations phase SACP: bbb-

• Downside resiliency assessment and impact: Moderate, no impact
• Debt structure impact: -2 notches
• Refinancing impact: Neutral
• Holistic analysis impact: -1 notch
• Counterparty assessment impact: Neutral

Operations phase SACP: bb-

Parent linkage and external influences (senior debt)

• Parent linkage: Delinked
• Project SACP: bb-
• Senior debt issue rating: BB-

Related Criteria

• Criteria | Infrastructure | General: General Project Finance Rating Methodology, Dec. 14, 2022
• Criteria | Infrastructure | General: Sector-Specific Project Finance Rating Methodology, Dec. 14, 2022
• General Criteria: Environmental, Social, And Governance Principles In Credit Ratings, Oct. 10, 2021
• Criteria | Structured Finance | General: Counterparty Risk Framework: Methodology And Assumptions, March 8, 2019
• General Criteria: Country Risk Assessment Methodology And Assumptions, Nov. 19, 2013
• General Criteria: Global Investment Criteria For Temporary Investments In Transaction Accounts, May 31, 2012
• General Criteria: Principles Of Credit Ratings, Feb. 16, 2011

Related Research

• Certain Project Finance Issue Ratings Placed Under Criteria Observation Following Criteria Update, Dec. 14, 2022
• North Queensland Export Terminal Issue Rating Raised To 'BB-' On Funding For Upcoming Maturity; Outlook Stable, Dec. 14, 2022.

Ratings List