(Fitch, 12.Aug.2024) — Fitch Ratings has downgraded New Fortress Energy Inc.’s (NFE) Long-Term Issuer Default Rating (IDR) to ‘B+’ from ‘BB-‘ and has placed it on Rating Watch Negative. The senior secured debt has been downgraded to ‘B+’/’RR4’ from ‘BB-‘/’RR4’. ‘RR4’ denotes average recovery in the event of default.
The downgrade and Negative Watch reflect NFE’s significant refinancing risk and highly constrained liquidity position given its capital-intensive growth strategy. Weaknesses include higher than previously expected EBITDA-leverage estimated to be greater than 6.0x in 2024-2025 under Fitch’s rating case, and commodity linked pricing in the company’s natural gas supply contracts. Concentration of cash flows in Latin America and ongoing execution risk including the development of complex LNG production assets further increase business risk.
The competitive positioning of NFE’s terminals offer long-term opportunities for natural gas supply and power plant development. Cash flow stability is expected to increase as the company executes more contracts, underpinned by some take-or-pay agreements and minimum volume commitments.
Key Rating Drivers
Refinancing and Liquidity Risk: NFE faces significant maturities over 2025-2026 and currently liquidity is highly constrained with the revolver fully drawn. NFE’s term loan B ($774 million outstanding) and revolving credit facility ($1.0 billion) have springing maturities that could be triggered by July 16, 2025 if the company’s 6.75% senior secured notes ($875 million) are not refinanced by that date and the 6.5% senior secured notes ($1.5 billion) are not refinanced by July 31, 2026, each 60 days before their maturity dates.
NFE has obtained a backstop agreement for refinancing its 2025 maturity, which partially addresses this risk. Failure to refinance these upcoming maturities on reasonable terms and in a timely manner, and generate adequate liquidity for NFE’s working capital requirements and ongoing growth projects, could result in further downgrades.
High Leverage: Fitch calculated 2024 leverage is expected to be over 6.0x, due to the delay in production from FLNG1 and slower demand growth in Puerto Rico. Fitch’s 2024 EBITDA estimate includes a one-time cash payment of $500 million-$600 million from FEMA as termination payment for contract cancellations in Puerto Rico. This payment alone constitutes about 40% of the total EBITDA in 2024. Lower settlement amounts or a delay in receiving proceeds would pressure both leverage and liquidity.
Fitch expects leverage to remain around 6.0x in 2025, improving to around 5.5x in 2026-2027 as projects ramp-up across its portfolio. Fitch will look for solid operations of the first FLNG unit, successful deployment of the following FLNG units, and continued expansion of operations in Puerto Rico and Brazil for sustained EBITDA growth.
At YE 2023, leverage was 6.0x, significantly higher than Fitch’s previous expectations of 3.1x as market prices for LNG declined significantly and expected growth from the terminals was delayed. NFE sold all of its 20% ownership in the LNG vessels to a joint venture, Energos Infrastructure in mid-February 2024. However, it continues to guarantee the vessel lease charters. Fitch considers the $2.0 billion sale leaseback transaction a long-term obligation and includes $1.4 billion as debt.
Commodity Price Linkage: NFE is paid for the gas it supplies based on the prevailing regional diesel prices. Fitch calculates year-to-date diesel prices in 2024 are 20% lower than average price in 2023. Fitch projects NFE will require spot market LNG purchases for about 10% of its gas supply requirements in 2024. Higher LNG prices, which could result from global macro conditions, would compress realized margins if diesel priced don’t rise in lock-step, or if they fall.
Fitch expects gas supplied under such contracts will account for about 70% of revenues over the next three years. Additionally, NFE’s agreement to supply up to 80 tbtu/year of natural gas in Puerto Rico does not have take-or-pay provisions, exposing earnings to demand volatility. As a comparison, other LNG producers secure long-term, take-or-pay contracts to support large liquefaction units.
Complex Capital Projects: NFE’s capex program includes construction of two LNG units, each a 1.4 million tonnes per year natural gas liquefaction unit. FLNG1 is mounted on three refurbished offshore oil rigs; FLNG2 will be onshore. The first unit installed in Altamira, Mexico was delayed and first cargo is now expected in 3Q24. As the project obtains feedgas from the U.S., it requires U.S. Energy Department approvals to export to non-FTA countries. It has obtained a U.S. Customs and Border Protection ruling allowing it to transport LNG in the U.S. and Puerto Rico.
The remaining construction program includes development of FLNG2 LNG import terminal, for which around $1.0 billion of funding has been spent or secured. We believe NFE could incur higher costs in order to receive full permitting or due to additional construction delays. Fitch views liquefied natural gas (LNG) production as one of the more complex midstream businesses. It exposes NFE to higher operational, execution and regulatory risk than its legacy gas supply to power businesses. Production of its own LNG provides supply security which is a positive.
In addition, NFE could pursue development of power plant projects in Brazil and Nicaragua requiring capex ranging between $1.5 billion to $2 billion, over each of the next two years, some of which would be discretionary. Capex exceeded $3.0 billion in 2023, far higher than our expectations, funded through FCF, debt, and asset sales.
Improving Contract Mix: NFE derives most of its margin from terminals, largely supplying natural gas. Sales are increasingly contracted with multiple contracts with a tenor of over ten years and take-or-pay features. There is considerable concentration risk in the portfolio. Over the next four years, Fitch projects around 50% of the EBITDA will be derived from Puerto Rico and Brazil, where political and economic volatility is balanced by the push for cleaner burning fuels. The pivot away from open market sales of LNG should lower cashflow volatility, with contributions from this segment expected to decline to less than 10% of EBITDA starting 2024.
Counterparty and Country Ceiling Exposure: NFE’s IDR is not capped by a country ceiling, as its cash flows from the Puerto Rico (N/R; no transfer and convertibility cap) and Mexico (BBB-/Stable) cover its hard currency interest expense. Fitch estimates that through 2027, around 46% of NFE’s cash flow will originate from Puerto Rico, 7% from Mexico with the remaining derived in Jamaica (BB-/Positive), Nicaragua (B/Stable) and Brazil (BB/Stable).
However, the counterparty credit profile is weak with about 75% of the revenues derived from customers that are not rated or rated below the BB-category. Diversity of the customer base partially offsets this risk.
Derivation Summary
NFE is closest in operations and geographical focus to LNG producer Cheniere Energy, Inc. (CEI, BBB-/Stable). NFE has operations in Puerto Rico, Jamaica, Mexico, Nicaragua and Brazil. NFE’s cash flow is supported by sale of LNG and power to with utilities, power generators and industrial customers in its operating regions. NFE’s contractual profile is much weaker compared with CEI, with lower portion of take-or-pay provisions, though it has multiple contracts with remaining term of over 10 years.
CEI’s contracts average around 15 years with a much higher portion of fixed take-or-pay revenues. NFE has significant concentration risk with around 50% of the revenues expected to be derived from Puerto Rico and Brazil. It also has a weaker counterparty profile and is expected to be about one-fourth of CEI in terms of consolidated EBITDA, all factors which drive the difference in ratings.
CEI generates its cashflows from two large LNG export facilities and accompanying infrastructure such as natural gas pipelines. CEI’s consolidated operations are supported by long-term, take-or-pay style contracts for import, export and pipeline capacity, and it has two highly rated operating subsidiaries Sabine Pass Liquification, LLC (BBB+/Stable), and Cheniere Corpus Christie Holdings, LLC (BBB+/Stable).
Fitch notes CEI’s underlying contracts are of much more substantial duration than most of its midstream peers, in addition to its primarily fee-based revenue. The contract profile is with investment grade counterparties, in contrast to NFE, which has almost 75% of its contracts with entities that are not rated or rated below the BB-category. Additionally, Cheniere’s contracts are supported by a pass-through of fixed and variable costs of LNG to contractually obligated offtakers, unlike NFE, which is exposed to changes in commodity price and offtake volumes.
The majority of NFE’s subsidiaries do not have project level debt, while CEI’s intermediate subsidiary and two operating projects have substantial leverage, and in a combined and severe downside case of payment default by a large customer and weak merchant price forecast realizations, cash could be trapped. Leverage for NFE under the Fitch rating case is expected to be weak in 2024-2025 averaging around 6.0x, compared to around 4.0x for CEI.
Fitch believes CEI has a demonstrated track record in management and completion of complex construction projects and less construction risk related to debottlenecking and the next planned expansion compared with NFE’s pipeline of FLNG, power plants and terminal projects which have substantial development and execution risk.
Key Assumptions
— Natural gas at Henry Hub (HH) as per Fitch’s price deck: $2.50/mcf in 2024, $3.0/Mcf in 2025, $3.0/mcf in 2026, and $2.75/mcf thereafter;
— LNG market spreads informed by Fitch’s price deck;
— Growth capital spending is largely funded with retained cash and debt;
— Proceeds of $500 million – $600 million from the FEMA claim received in 2H 2024;
— Dividends in line with the company’s guidance;
— Interest expense reflects a base rate as per the Fitch Global Economic Outlook;
— Execution of committed growth projects and any additional growth projects annually during the outer years of the forecast;
— Construction for FLNG2 completed on-time and per Fitch’s current assumptions.
Recovery Analysis
For the Recovery Rating, Fitch estimates the company’s going-concern value was greater than the liquidation value, despite the high equity value retained by NFE in its assets. The going-concern multiple used was a 5.0x EBITDA multiple, which reflects the default occurring during construction and deployment of the FLNG assets, and the reorganization would be impacted by the complexity of the construction project and the location of the terminals.
There have been a limited number of bankruptcies within the midstream sector. Two recent gathering and processing bankruptcies of companies indicate an EBITDA multiple between 5.0x and 7.0x, by Fitch’s best estimates. In its recent bankruptcy case study report, “Energy, Power and Commodities Bankruptcies Enterprise Value and Creditor Recoveries,” published in September 2021, the median enterprise valuation exit multiple for the 51 energy cases with sufficient data to estimate was 5.3x, with a wide range of multiples observed.
Fitch’s going concern EBITDA estimate is $725 million. It is a measure of Fitch’s view of a sustainable, post-reorganization EBITDA level upon which Fitch bases the valuation of the company. As per criteria, the going concern EBITDA reflects some residual portion of the distress that caused the default.
Fitch calculated administrative claims to be 10%, which is the standard assumption. The outcome is a ‘B+’/’RR4’ rating for the senior secured debt.
Additionally, Fitch believes, on a normalized run-rate basis almost all of the revenues will come from outside U.S., in countries where Fitch does not assign an uplift to the debt based on the recovery profile. Per Fitch’s “Corporates Recovery Ratings and Instrument Ratings Criteria,” secured debt can be notched up to ‘RR1’/’+3’ from the IDR; however, the instrument ratings have been capped at ‘RR4’ due to Fitch’s “Country Specific Treatment of Recovery Rating Criteria”.
RATING SENSITIVITIES
Factors that Could, Individually or Collectively, Lead to Resolving the Rating Watch
–The Rating Watch Negative could be resolved if the 2025 maturity was refinanced on reasonable terms in a timely manner, and the company secured liquidity to adequately cover its working capital needs and non-discretionary capital expense.
Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade
Though not expected in the near term, Fitch could take a positive rating action if:
–Fitch calculated EBITDA leverage below 5.0x on a sustained basis;
–Sustained record of production at or around nameplate capacity at FLNG1;
–Stronger contractual structures, including reduced commodity price linkages, long-term, fixed-price contracts and improving counterparty profile.
Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade
–2025 and 2026 debt maturities not addressed in a timely manner;
–Expectation of EBITDA interest coverage below 2.0x;
–Fitch calculated EBITDA leverage above 6.0x on a sustained basis;
–Excessive cost and/or schedule overruns on current construction projects;
–Weaker fundamentals in the target markets lowering realized margins, putting additional pressure on the company’s cash flow generation;
–Weaker business mix, including the company entering into more volatile sectors.
Liquidity and Debt Structure
Liquidity Constrained: As of June 30, 2024, NFE had about $133 million of unrestricted cash, and about $165 million of restricted cash on its balance sheet restricted to funding of a thermal plant project. As of June 30, 2024, the $1.0 billion revolver was fully drawn. The revolver matures in April 2026. The revolver and the term loan ($772 million drawn), both come due 60 days prior to the 2025 notes, if the said notes are not refinanced prior to their maturity date.
As of March 31, 2024, the company is compliant under the covenants required by the letter of credit facility and the revolver, which require it to maintain a debt to capitalization ratio of less than 0.7:1.0 and, for quarters in which the revolver is more than 50% drawn, the debt to annualized EBITDA ratio of less than 4.0:1.0.
Near Term Maturities: Senior secured notes amounting to $875.0 billion mature in 2025, and $1.50 billion of senior secured notes mature in 2026. Principal Payments on the $355.6 million BNDES term loan of which about $275 million is drawn, are required after April 2026, and due quarterly thereafter until maturity in 2045.
Issuer Profile
New Fortress Energy LLC is a gas-to-power energy infrastructure company. The company spans the entire production and delivery chain from natural gas procurement and LNG production to logistics, shipping, terminals and conversion or development of natural gas-fired generation.
Summary of Financial Adjustments
Consolidated leverage for NFE includes asset level debt and the Energos Formation Transaction obligations. Under Fitch’s Corporate Criteria, the Energos lease obligations are considered long-term obligations and the reported lease liability is treated as debt.
The preferred stock at GMLP is given a 50% equity credit due to its perpetuality and cumulative nature of the dividends and interest. NFE’s recently issued Series A Convertible Preferred Stock is treated as 100% debt as its dividend rate increases by 2% until the company pays of all previously accrued but unpaid dividends.
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