/raid1/www/Hosts/bankrupt/TCRLA

/raid1/www/Hosts/bankrupt/TCRLA_Public/240821.mbx T R O U B L E D C O M P A N Y R E P O R T E R L A T I N A M E R I C A Wednesday, August 21, 2024, Vol. 25, No. 168 Headlines B A H A M A S BAHA MAR: Builder Blames Developer Debt as $1.5B Trial Wraps B E R M U D A BERMUDA: Inflation Holds Steady B R A Z I L COMPANHIA SIDERURGICA: S&P Affirms 'BB' Ratings, Outlook Now Neg. SYLVAMO CORP: Fitch Assigns 'BB+' LongTerm IDR, Outlook Stable J A M A I C A JAMAICA: Exports to CARICOM Lower for First Quarter of 2024 RADIO JAMAICA: Incurs $167.48 Million Loss in Q1 P U E R T O R I C O NEW FORTRESS: Fitch Lowers IDR to 'B+', On Rating Watch Neg. - - - - - ============= B A H A M A S ============= BAHA MAR: Builder Blames Developer Debt as $1.5B Trial Wraps ------------------------------------------------------------ Rachel Scharf at law360.com reports that counsel for the Chinese state-owned construction firm that built the Bahamian luxury resort Baha Mar closed out a bench trial in New York state court on arguing that it was the resort developer's overleveraged debt, not delays in the building process, that led to $1.5 billion in losses. ============= B E R M U D A ============= BERMUDA: Inflation Holds Steady ------------------------------- Gareth Finighan at the Royal Gazette reports that inflation remained flat after peaking in the second half of 2022, as new figures show the Consumer Price Index holding steady at 2.5 per cent this February, according to figures released by the Department of Statistics. The year-over-year percentage change in the all items index was little changed from the figures for December 2023 (2.4 per cent) and January 2024 (2.5 per cent), according to The Royal Gazette. But price increases that were realized included the cost of fuel, which rose by 6.2 per cent over the year, the report notes. Smokers and drinkers also had to pay more for their habits, with prices in the tobacco and liquor sector increasing by 4.3 per cent, the report relays. And food prices continued to rise above the rate of inflation, up 4 per cent compared with February 2023, the report recalls. But there was a dip in the cost of transport and foreign travel, while other sectors such as rent and clothing reported only marginal increases, the report relays. According to the government statistics, inflation flatlined at around 2.5 per cent in the three months between December 2023 and February this year after peaking at 3.9 per cent last October, the report notes. Within the food sector, the cost of tea and coffee jumped by almost 15 per cent, followed closely by sugar and confectionery, which rose by 10.1 per cent, the report discloses. Bread, fruit juices, soft drinks, and mineral water also saw significant increases, the report says. =========== B R A Z I L =========== COMPANHIA SIDERURGICA: S&P Affirms 'BB' Ratings, Outlook Now Neg. ------------------------------------------------------------------ S&P Global Ratings revised the outlook on its global and national scale ratings on Brazil-based integrated steel, mining, and cement producer Companhia Siderurgica Nacional (CSN) to negative from stable. S&P also affirmed its 'BB' global scale and 'brAAA' national scale ratings on the company. At the same time, S&P revised the outlook on CSN Mineracao S.A. (CMIN) to negative from stable and affirmed the 'brAAA' rating, mirroring its action on its parent. S&P also affirmed its issue-level ratings on CSN Islands XII Corp.'s senior unsecured notes and CMIN's senior unsecured debentures. The recovery ratings on both remain unchanged. The negative outlook reflects the possibility of a downgrade in the next six to 12 months if CSN is unable to reduce its leverage to S&P's base-case forecast of 4.0x-4.5x in 2024 and 2025, or if it shows mounting strains on liquidity given lower-than-expected cash generation, a persistently high interest burden, and persistently high cash outflows. Results from the first half of 2024 show that Brazilian steelmakers are continuing to suffer from historically high levels of steel imports, which are pressuring domestic prices. For CSN, average prices declined by 6% in the first half from the same period last year, even as total volumes grew about 10%. But CSN has also cut costs, and it's focusing on products with higher added value, mitigating the impact of the lower prices. As a result, the EBITDA margin from steel is showing signs of improvement on a monthly basis, though it did remain at 5.1% in the first half. S&P said, "We expect gradual improvement in the second half, with a better product mix, increasing prices and efficiency measures, and better overall conditions domestically (driven by the recent increase in taxes and quotas on imported steel taken by the federal government). All of this--in addition to solid performance from mining, cement, and other divisions--will help CSN meet expectations for lower leverage. "We forecast that consolidated EBITDA will remain close to 10 billion Brazilian reals (R$) in 2024 (compared with the R$11.6 billion that our previous forecast saw), and we forecast an EBITDA margin of 19.8% (compared with 22.4% in our previous forecast)." Capital expenditures will remain high, in our view, at roughly R$5 billion in both 2024 and 2025, with investments directed mainly toward improving capacity in its mining operations and expanding cement capacity organically in Brazil and in its steel operations. This should result in very low, though positive, free operating cash flow in both years. S&P said, "Furthermore, we continue to think that dividend payouts will stay at roughly R$2 billion in each of the next two years (CSN already paid R$1.2 billion in the first half of 2024), and that means the company won't be able to reduce nominal debt. "Stronger operational performance in the second half should lead to a decline in net leverage. But we still see debt to EBITDA remaining at 4.0x-4.5x in 2024-2025 (down from 5.8x for the 12 months that ended June 2024) while funds from operations (FFO) to debt stays marginally below 12% (up from 8.6%)." S&P's metrics differ significantly from those reported by the company because of the following adjustments: -- S&P's debt metrics include the Transnordestina project's debt, pension adjustments, iron ore prepayments, leasing obligations, asset retirement obligations, and tax installments. These added R$14.9 billion to CSN's debt as of June 30, 2024. -- S&P's adjusted EBITDA excludes the proportional contribution from MRS Logistica S.A. and some nonrecurrent factors, such as asset sales, the recognition of the PIS/COFINS tax credits, and fair value adjustments on shares of Usinas Siderurgicas de Minas Gerais S.A. (Usiminas). S&P said, "We expect large interest payments, capex, and dividends to continue in the near future; this, in our view, will reduce CSN's liquidity cushion, despite the robust cash position that it has kept (R$15.5 billion as of the end of June 2024). Still, we think CSN will be able to maintain a cushion of more than 20% in its liquidity position." Additionally, the company has been vocal about its pursuit of asset sales that will contribute to liquidity and leverage. These could include a sale of the shares in Usiminas (equivalent to R$1.2 billion as of June 2024) or a divestment of assets, such as a sale of its energy division or of a minor stake at CSN Mineração. These possibilities aren't included in our base-case forecast since a sale would depend on market conditions and since the timing of any sale is uncertain. CSN's cement operations have recently had good performance, boosted by the integration of the operations it acquired in 2022 from LafargeHolcim (Brasil) S.A., as well as the synergies that it captured. Despite Brazil's persistently high interest rates, which have an effect on some project launches, S&P believes the federal government's continuous investment in the Minha Casa Minha Vida national housing program (which subsidizes home purchases for low-income families) and the increase in infrastructure projects will bolster demand in the segment. Additionally, CSN management has said that it still sees room for efficiency gains in cement, especially in the logistics structure. Because of all this, we forecast 2024 EBITDA of close to R$1.6 billion from CSN's cement operations--which would be close to 13% of CSN's consolidated EBITDA--with potential upside in coming years. At the same time, CSN has been expanding its iron ore production volume--a result of its investment in capacity--while also reducing volume purchased from third parties. This, together with its strict approach to controlling costs and the depreciation of the Brazilian real, has been adding to margins in its mining division, despite the fluctuations in the prices of iron ore. Consequently, mining continues to represent the bulk of CSN's EBITDA in S&P's forecast--roughly 69% of EBITDA in 2024 and 56% in 2025. SYLVAMO CORP: Fitch Assigns 'BB+' LongTerm IDR, Outlook Stable -------------------------------------------------------------- Fitch Ratings has assigned Sylvamo Corporation a first-time Long-Term Issuer Default Rating (IDRs) of 'BB+'. The Rating Outlook is Stable. Fitch has also assigned 'BBB-'/'RR1' ratings to Sylvamo's first-lien revolver and term loans, and 'BB+'/'RR4' rating to its unsecured notes. The 'BB+' rating reflects Sylvamo's significant scale and low-cost operations, strong FCF generation, and its conservative leverage and capital allocation policies against the backdrop of a long-term secular decline facing the paper market. Fitch also notes the credit support provided by the company's substantial forestry holdings in Brazil. Key Rating Drivers Large Scale Low-Cost Producer: Sylvamo's mills, spread across North America, Europe and Latin America are among the lowest-cost producers of uncoated freesheet in the world, with the bulk of the company's approximately three million short tons of annual capacity in the bottom 1st and 2nd quartile of the global cost curve. This favorable cost position partially buffers margins from uncertain pricing and negative volume trends in the paper industry. Since the spin-off from International Paper (IP) in 2021, Sylvamo has both increased capital expenditures and has targeted investments and upgrades across its asset base, with the effect of maintaining or improving the cost competitiveness of the operations. The company maintains a pipeline of high-return projects, which Fitch believes will continue to place Sylvamo at the lower end of the cost curve. Six of Sylvamo's seven mills are vertically integrated from the round wood processing, into pulp, and finally through paper production stage, a configuration which is highly cost effective, and allows the company to generate the majority (~80%) of its energy requirements. Sylvamo's mills are also located in attractive fiber regions where Sylvamo has access to low cost wood. Secular Industry Decline: Demand for all types of graphic paper have been in secular decline for several decades due to substitution by electronic and digital media. However, uncoated freesheet (UFS) of the type Sylvamo produces has seen a less precipitous decline than other paper types such as newsprint paper. Fitch estimates that Sylvamo's UFS volumes will decline in the 4% range per annum through the forecast period, with long-term demand supported by ongoing consumption in the education, communication and entertainment sectors. The paper market does benefit from an orderly market structure, with major producers regularly reducing capacity to maintain a market supply/demand balance, thus supporting price despite the negative volume trends. Average selling price for UFS has seen a roughly 40% increase since 2020, and Fitch expects flat to modestly increasing price over the forecast period partially mitigating the negative volume effect. Fitch notes that a number of Sylvamo's peers are converting mills to more economically sustainable containerboard and pulp products to diversify away from paper, which helps maintain equilibrium in the paper market. Conservative Financial Policies: Sylvamo has meaningfully reduced gross debt since spinoff, from $1.5 billion at October 2021, to $940 million as of March 31st 2024, resulting in Fitch calculated EBITDA leverage of about 1.7x. Fitch believes that maintaining leverage in this range anchors the company's capital allocation strategy. Annual dividends are a principal avenue for shareholder return, and are currently around $74 million, which can be easily accommodated from cash flow from operations in the $500 million area. Sylvamo does have an active share repurchase program, which Fitch assumes will be conducted within the bounds of a conservative leverage profile. Additionally, Fitch observes modest capex spending oriented toward maintenance and efficiency improvements and does not envision large scale M&A or large conversion projects, which could potentially stress the agency's leverage sensitivity bounds. Steady Cash Flow Generation: Since separation from IP, Sylvamo has generated EBITDA margins in the mid-teens, with positive annual FCF margins above 5% implying a healthy deleveraging capacity. Cash flows have seen some variability due to inventory destocking in the 2022-2023 period, and from scheduled maintenance downtime at various facilities. However, the economics of Sylvamo's business and overall cash flows should remain within a relatively tight range through Fitch's forecast period. Little Impact from Termination of Offtake Agreements: Sylvamo has the option, in early 2025 and early 2026, to terminate offtake agreements with IP related to production from the Georgetown and Riverdale facilities in North America, which are still owned and operated by IP. Per agreement terms, Sylvamo pays IP cash costs for product while maintaining the requisite order book to keep the facilities operating at budgeted capacity. Volumes attributable to Georgetown and Riverdale represent around 17% of Sylvamo's total. Should either party terminate the agreement, Fitch believes that Sylvamo will be able to effectively switch capacity to other facilities, within the context of the currently forecast capex budget. Therefore, a termination of the agreement would have a negligible impact on credit quality. Sylvamo is not responsible for any prospective shut down costs for the plants. Substantial Forestry Assets: Sylvamo's forestry holdings in Brazil are a key credit consideration supporting its 'BB+' credit profile. The company owns about 250,000 acres of land in the state of Sao Paulo valued at approximately $1.0 billion. The favorable conditions for growing trees in the region makes this property efficient by global standards, and gives the company a sustainable advantage in terms of cost of fiber and transportation costs between forest and mills. The assets also represent to Sylvamo a significant source of alternate liquidity should the company need to monetize these holdings, potentially via a sale leaseback or similar arrangement that would still afford Sylvamo access to fiber to supply its three mills in the region. Derivation Summary A notable strength for Sylvamo within the paper and packaging sector is its consistency in maintaining low leverage compared with many high-rated issuers in the industry. Sylvamo has consistently maintained EBITDA leverage of around 1.5x, significantly lower than its peers including Stora Enso Oyj (BBB-/Stable) and Suzano S.A. (BBB-/Stable). This conservative leverage profile provides Sylvamo with ample financial flexibility and provides an appropriate buffer to the cyclically declining paper industry. Sylvamo's closest peer, Domtar Corporation (BB-/Stable), generates slightly higher revenue. However, Sylvamo demonstrates superior EBITDA and FCF margins. Both companies are similar in terms of EBITDA generation and share a geographic focus that includes North America and Europe, as well as the production of wood pulp and uncoated freesheet paper. The key differentiator in their ratings is Sylvamo's EBITDA leverage, e.g. YE 2023 leverage for Sylvamo was 1.7x compared to Domtar's 4.9x. Sylvamo's selective approach to accretive acquisitions has contributed to the maintenance of its leverage profile. Sylvamo's revenue is smaller compared to its paper and packaging peers Suzano S.A. and Stora Enso Oyj, and its EBITDA is below these companies and Klabin S.A. (BB+/Stable). Suzano is the world's leading producer of market pulp, and leading producer of printing and writing paper in Brazil. Sylvamo has significantly smaller scale than Suzano but its credit profile benefits from a more conservative financial policy. Key Assumptions - Modest annual declines in global UFS volumes (-4% area) with stable pricing through the forecast period; - Capex in the $220 million range as per management, including costs of diverting production away from Georgetown and Riverdale; - Dividends and share buy backs in line with historical trends; - Georgetown and Riverdale offtake agreements terminate in January 2025 and 2026, respectively; - Sylvamo's disputed Brazil tax of $120 million paid in 2025 and funded via new debt. RATING SENSITIVITIES Factors That Could, Individually Or Collectively, Lead To Positive Rating Action/Upgrade - Maintenance of conservative financial and capital allocation policies along with sufficient liquidity buffers; - Stabilization of secular demand decline in industry; - EBITDA Leverage consistently below 1.5x. Factors That Could, Individually Or Collectively, Lead To Negative Rating Action/Downgrade - EBITDA Leverage consistently above 2.5x; - Any unfavorable change in current leverage or capital allocation policy; - More rapid than expected deterioration in the paper segment resulting in depressed margins and materially lowered FCF generation; - Deterioration in liquidity buffers including unencumbered forest landholdings. Liquidity and Debt Structure As of June 30, 2024, Sylvamo had an available borrowing capacity of $429 million on its Revolving Credit Facility due 2029, plus total cash and investments of $205 million (of which $60 million in escrow for Brazilian Tax payment), resulting in total liquidity of $634 million, or $574 million excluding the Brazil tax escrow. Issuer Profile Sylvamo is one of the world's largest manufacturers of uncoated freesheet paper. It has strong assets, including seven cost-efficient mills and extensive Eucalyptus forest lands in Brazil, which help lower production costs. Date of Relevant Committee July 16, 2024 ESG Considerations The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. Entity/Debt Rating Recovery ----------- ------ -------- Sylvamo Corporation LT IDR BB+ New Rating senior unsecured LT BB+ New Rating RR4 senior secured LT BBB- New Rating RR1 ============= J A M A I C A ============= JAMAICA: Exports to CARICOM Lower for First Quarter of 2024 ----------------------------------------------------------- RJR News reports that exports from Jamaica to the Caribbean region were lower for the first quarter of this year. The International Merchandise Trade released by the Statistical Institute of Jamaica says total exports to CARICOM were valued at US$32 million for the period, according to RJR News. That's a 7.6 per cent decline compared with the US$34.6 million earned from goods being sent to the region for the similar period last year, the report notes. STATIN says this was mainly due to lower exports of "Mineral Fuels", along with "Beverages & Tobacco," the report relays. Total exports of "Mineral Fuels" fell to US$5.9 million, compared with the US$7.1 million earned in the three months ended March 2023, the report says. Exports of "Beverages & Tobacco" came in at US$5.4 million, the report notes. This represents a 16.8 per cent drop, from the US$6.5 million earned in the comparable period ended March 2023, the report adds. About Jamaica Jamaica is an island country situated in the Caribbean Sea. Jamaica is an upper-middle income country with an economy heavily dependent on tourism. Other major sectors of the Jamaican economy include agriculture, mining, manufacturing, petroleum refining, financial and insurance services. In October 2023, Moody's upgraded the Government of Jamaica's long-term issuer and senior unsecured ratings to B1 from B2, and senior unsecured shelf rating to (P)B1 from (P)B2. The outlook has been changed to positive from stable. The upgrade of Jamaica's rating to B1 reflects the government's sustained commitment to fiscal consolidation and debt reduction. The positive outlook reflects Moody's assessment that a continuation of the favorable fiscal trajectory will further increase Jamaica's credit resilience. S&P Global Ratings raised on September 13, 2023, its long-term foreign and local currency sovereign credit ratings on Jamaica to 'BB-' from 'B+', and affirmed its short-term foreign and local currency sovereign credit ratings at 'B'. The stable outlook reflects S&P's expectation that the government will remain committed to prudent fiscal policies and reducing debt, as well as supportive economic policies including a flexible exchange rate regime and effective monetary policy. In March 2022, Fitch Ratings affirmed Jamaica's Long-Term Foreign Currency Issuer Default Rating (IDR) at 'B+'. The Rating Outlook is Stable. RADIO JAMAICA: Incurs $167.48 Million Loss in Q1 ------------------------------------------------ RJR News reports that Radio Jamaica Limited is reporting a loss of $167.48 million in its first quarter ended June 2024. The company, which also does business as the RJRGLEANER Communications Group, says in the comparative period ended June 2023, it made a loss of $37.85 million, according to RJR News. Radio Jamaica says this was linked to higher overall expenses and lower other income, the report notes. The company's revenue was $1.2 billion for April to June 2024, compared to the $1.29 billion made in the similar period last year, the report relays. Lower advertising spend contributed to the roughly $94 million drop in revenues, with inflows from audio/visual, which includes Television, down $37 million, the report says. Income from radio and print also declined, the report says. Radio Jamaica says it has a five-point plan it hopes will help to turn around its losses, the report discloses. This includes the rollout of Next Gen TV, which will add new advertising streams, along with the deployment of set top boxes, the report relays. The group is also looking to boost income from its real estate holdings, the report adds. ===================== P U E R T O R I C O ===================== NEW FORTRESS: Fitch Lowers IDR to 'B+', On Rating Watch Neg. ------------------------------------------------------------ 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. Fitch believes 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 its 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. MACROECONOMIC ASSUMPTIONS AND SECTOR FORECASTS Fitch's latest quarterly Global Corporates Macro and Sector Forecasts data file which aggregates key data points used in its credit analysis. Fitch's macroeconomic forecasts, commodity price assumptions, default rate forecasts, sector key performance indicators and sector-level forecasts are among the data items included. ESG Considerations NFE has an ESG relevance score of '4' for Exposure to Environmental Impacts due to potential operational challenges related to extreme weather events in its operating regions. This has a negative impact on the credit profile and is relevant to the rating in conjunction with other factors. NFE has an ESG relevance score of '4' for Governance Structure due to its concentrated ownership. This has a negative impact on the credit profile and is relevant to the rating in conjunction with other factors. NFE has an ESG relevance score of '4' for Financial Transparency due to the level of detail and transparency in its financial disclosure that is weaker than other industry peers. This has a negative impact on the credit profile and is relevant to the rating in conjunction with other factors. The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. Entity/Debt Rating Recovery Prior ----------- ------ -------- ----- New Fortress Energy Inc. LT IDR B+ Downgrade BB- senior secured LT B+ Downgrade RR4 BB- ********* S U B S C R I P T I O N I N F O R M A T I O N Troubled Company Reporter-Latin America is a daily newsletter co-published by Bankruptcy Creditors' Service, Inc., Fairless Hills, Pennsylvania, USA, and Beard Group, Inc., Washington, D.C., USA, Marites O. Claro, Joy A. Agravante, Rousel Elaine T. Fernandez, Julie Anne L. Toledo, Ivy B. Magdadaro, and Peter A. Chapman, Editors. Copyright 2024. All rights reserved. ISSN 1529-2746. This material is copyrighted and any commercial use, resale or publication in any form (including e-mail forwarding, electronic re-mailing and photocopying) is strictly prohibited without prior written permission of the publishers. Information contained herein is obtained from sources believed to be reliable, but is not guaranteed. The TCR Latin America subscription rate is US$775 per half-year, delivered via e-mail. 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