Newcastle Coal Infrastructure Group (NCIG) has issued notices to all its shippers, giving them an option to provide a letter of credit or cash to for a USD85m reserve. As a result, S&P placed NCIG’s BBB- rating for the senior secured debt – and B rating for the junior debt – on CreditWatch with positive implications
NCIG has issued notices to all its shippers on 24 January 2017, giving them an option to provide a letter of credit equal to their share of the debt service reserve account (DSRA) by 28 February 2017. Alternatively, shippers may opt for an increase in their toll charge to fully cash fund the reserve over the next few months. The shippers, rather than NCIG, will stand behind the letters of credit and be liable to an issuing bank in the event of a draw.
The CreditWatch placements reflect S&P’s understanding that NCIG intends to implement a senior DSRA of USD85m, equal to approximately six months of senior debt service.
The majority of funding for the DSRA is expected to be in place before the end of February 2017, with the remaining 10% to 15% built over the remaining three months. NCIG will execute the necessary documentation with the security agent to confirm the details of the new reserve.
Investors should note that coupons on the NCIG junior notes can be deferred, however the deferred interest capitalises into principal outstanding and a step up premium of 75bps per annum applies to deferred coupons.
Further, S&P will raise the ratings on the senior and junior debt by one notch to BBB and B+ respectively, once the reserve is fully funded and all relevant documentation has been executed. S&P anticipate this to be completed by the end of May 2017. If NCIG fails to fully implement the DSRA as it planned, S&P would affirm the ratings with a stable outlook.
“Completion of the DSRA and execution of all necessary documents in a satisfactory manner would lead us to revise our assessment of the structural protection features of the transaction to neutral from fair, which would in turn lead to a one notch rating upgrade on both the senior and junior debt.”
It’s noted that the DSRA or letters of credit are only available to meet senior debt service expenses. Any draw on the reserve that lowers the balance below USD85m will require NCIG to increase the toll charge to replenish the reserve. Once the DSRA is in place, no payments to junior debt holders are permitted unless the DSRA balance is USD85m.