LNG projects RasGas II and RasGas 3 debt affirmed at 'A'

Standard & Poor's also affirmed its 'A' long-term debt rating on the $1.55bn senior secured bonds issued by RasGas 3 (comprising $750m Series C and $800m Series D bonds, due 2016 and 2027, respectively). The outlook on all ratings is stable.

At the same time, we assigned a recovery rating of '1' to the bonds, indicating our expectation of very high (90%-100%) recovery in the event of a payment default. To date, there have been few defaults in the sector in which the project operates in Qatar.

The $1.40bn Series A bonds and $850m Series B bonds issued jointly by RasGas II and RasGas 3 rank pari passu with the $1.55bn senior secured bonds issued by RasGas3 as well as with all other senior debt at RasGas II and RasGas 3 (collectively, RasGas). Other senior debt includes a $970m bank facility, $1.38bn in shareholder loans issued as part of tranche 1, and $664m of shareholder loans issued under tranche 2.

RasGas II and RasGas 3 are three-train (trains 3, 4, and 5) and two-train (trains 6 and 7) liquefied natural gas (LNG) companies, respectively, in the State of Qatar (AA-/Stable/A-1+) about 70% owned by Qatar Petroleum (foreign currency AA-/Stable/--) and about 30% owned by wholly owned subsidiaries of Exxon Mobil Corp. (AAA/Stable/A-1+).

The ratings reflect a number of credit weaknesses, including the potential volatility of LNG revenues; high counterparty risk; and RasGas II's future exposure to indemnity payments and continued exposure to the spot LNG markets if the Adriatic terminal in Italy--which supports a sale and purchase agreement (SPA) with Edison SpA (BBB+/Positive/A-2)--is not completed by early 2009.

These weaknesses are offset by a range of credit strengths, including the elimination of most potential sales volume risk by the presence of long-term SPAs; RasGas' good geographic revenue diversity; and low technological and operational risks for trains 3, 4, and 5, given the almost flawless construction and operational performance of Ras Laffan Liquefied Natural Gas Co. Ltd. (senior secured debt A/Stable) trains 1 and 2.

'We derive comfort from the fact that construction at RasGas, and that of associated third-party terminals and ships, is largely on schedule, with the exception of minor construction delays at the Edison terminal in Italy and the Zeebrugge terminal in Belgium,' said Standard & Poor's credit analyst Karim Nassif.

The stable outlook also reflects likely favorable natural gas fundamentals in RasGas' target markets over the next five years, good spot market sales potential over the next three years, and strong operational performance--all of which lead us to expect strong debt service coverage ratios.

Rating upside potential is limited over the short term, given the substantial amount of construction activity remaining and the relatively weak creditworthiness of offtakers. Any rating improvement over the long term will likely be limited by the project's weak structural and security arrangements. The outlook could be revised to negative, or the ratings lowered, if construction problems delay the commissioning of RasGas infrastructure or related works, offtaker credit declines, SPAs come under pressure, or global LNG markets deteriorate.