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Moody’s Investor Service assigns A3 foreign currency issuer rating to Petronas LNG

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LNG Industry,

Moody’s Investor Service has announced that it has assigned an A3 foreign currency issuer rating to Petronas LNG Ltd (PLL). Moody’s also claims that, at the same time, it has affirmed PLL’s A3 local issuer rating. The outlook on all ratings is stable.

Moody’s Vice President and Senior Credit Officer, Vikas Halan, said: “PLL's A3 foreign and local currency issuer ratings are positioned two notches below its ultimate parent, Petroliam Nasional Berhad's (Petronas') A1 issuer rating. This top down approach reflects PLL's full ownership by, and strong operational and financial integration with Petronas, which in turn is Malaysia's national oil company and is wholly owned by the Malaysian sovereign (A3 stable).”

Petronas has provided corporate guarantees to all of PLL’s counterparties for long-term facility purchases of LNG. In addition to this, PLL will benefit from an additional corporate guarantee facility that is provided by Petronas for PLL’s long-term offtake commitment in relation to Australia’s Gladstone LNG project.

Halan, who also serves as Moody’s Lead Analyst for PLL and Petronas, added: “A strong indicator of Petronas' financial support was an equity injection of $130 million in combination with no dividend payments to the parent in 2015, in order to fund the cash flow shortfall in this year on the back of declined LNG prices.”

In addition to this, PLL is capable of withdrawing from Petronas’ umbrella credit facility for liquidity management. Petronas is also willing to provide PLL with intercompany loans, subject, of course, to particular internal conditions.

PLL also holds the exclusive right to both market and trade Petronas’ entire global LNG portfolio. This includes Gladstone LNG and floating LNG (FLNG) projects 1 and 2, as well as the Pacific Northwest LNG (PNW LNG) project in Canada. These are typically long-term projects, and are expected to contribute to a more balanced spot/long-term trade ratio of PLL. Furthermore, once all of these projects finally reach their full capacity, PLL’s operating scale will increase.

Petronas also provides management support and oversight to PLL, with PLL providing monthly reports on risk and governance. These reports are sent to a committee chaired by Petronas. In addition to this, PLL has an integrated treasury function with Petronas, in which is money is held centrally by Petronas and cash flow requirements are shared with its parent.

Nonetheless, both PLL’s foreign and local currency ratings are constrained by the earnings of the company and cash flow volatility from spot trading. This was illustrated by an incurred loss of over $250 million in 2015. This is amplified by PLL’s small scale trading book, meaning that the company is also susceptible to significant losses from the risk of non-performance.

PLL has managed to decrease its exposure to risks related to logistics through the use of long-term charters from MISC Berhad (Baa2 stable), which is its sister company.

The rating outlook is stable, which Moody’s claims mirrors its belief that there will be continued support and linkages with its ultimate parent Petronas, as well as its strategic importance to Petronas’ LNG business.

Moody’s claims that upward pressure in the next 12 – 18 months on PLL’s rating is not likely, due to the fact there are strong ratings linkages to that of its ultimate parent, Petronas, and a suppressed LNG trading environment. Moody’s adds that it will consider an upgrade should Petronas’ rating be upgraded.

Moody’s also says that downward pressure may occur if the following happen:

  • There is a reduction in supervision and operational/financial support from Petronas to PLL.
  • There is a decrease Petronas’ ownership of PLL.
  • The issuer rating for Petronas is downgraded.
  • There is a material increase in PLL’s risk appetite.

A top down approach was used to assign PLL’s ratings, evaluating the following:

  • Petronas’ full ownership of the company.
  • The company’s operational and financial integration with Petronas.
  • Both Petronas’ willingness and ability to offer further support to PLL should there be any distress.

Edited from various sources by David Rowlands

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