OREANDA-NEWS. S&P Global Ratings today affirmed its 'AA-' long-term corporate credit rating on Qatar-based liquefied natural gas (LNG) shipping company Nakilat Inc. The outlook is stable. At the same time, we affirmed our 'AA-' issue rating on Nakilat's $850 million senior secured bonds and our 'A+' issue rating on its $300 million secured subordinated bonds.

The affirmation reflects Nakilat's continued importance to Qatar's strategy for LNG distribution around the world. Nakilat's vessels cover about 65% of the transportation requirements of Qatar's LNG industry, which represents 90% of government revenues. In our view, there is an extremely high likelihood that Nakilat would receive timely and sufficient extraordinary support from the Qatari government if needed. We regard Nakilat as a government-related entity (GRE).

The affirmation is also based on our expectation that Nakilat's solid operating performance will continue and that it will maintain its long-term charter contracts with Qatar's largest LNG producers, which mitigates any potential LNG price volatility and currently weak charter rate conditions. Nakilat's ownership of the world's largest LNG fleet (25 vessels)--which allows Qatar to control the country's LNG supply chain--leads us to assume that the company will continue to successfully report consistent profitability measures. Additional factors supporting our assessment of Nakilat's business profile include:

Availability-based payment streams under charter contracts, which protect Nakilat from the risk of delays in the charterer's own projects or of drops in demand for LNG from the end-user. Reliable operating track record since the delivery of the first vessel in August 2008 with vessel reliability above 99% for the last five years. Healthy credit quality of charterers such as Rasgas and Qatargas, two of the largest LNG producers in the world. Comprehensive insurance policies, including war risk insurance. Together with various provisions under the charter agreements, these cover Nakilat against political stress scenarios such as the hypothetical closure of the Strait of Hormuz for about 30 months. These positive factors are only partly offset by Nakilat's:

Exposure to loss-of-vessel incidents, as well as certain uninsured forces majeures, including weather and terrorist events. Huge customer concentration. Since Nakilat was awarded 25-year charter contracts in 2006 and 2007, it has sustained credit ratios close to current levels (including debt to EBITDA of about 7.0x and funds from operations (FFO) to debt of about 6%). Despite relatively high leverage, our assessment of Nakilat's financial risk profile reflects our forecast that the company's ratio of EBITDA interest coverage will remain above 2.0x over 2016-2017. In our opinion, EBITDA interest coverage is a better indicator of the company's future leverage due to its predictable cash flows and interest rate payments.

Furthermore, our analysis incorporates Nakilat's better-than-peer-average to obtain financing from domestic, regional banks and capital markets at compellingly low rates. In our view, this indicates a market perception that lending to Nakilat is broadly equivalent to lending to the Qatari government.

Our forecast incorporates the assumption that long-term charter contracts will remain in place for the next 15 years. Additional assumptions for our base-case forecast for the next two years include:

Fairly flat revenue growth of about 0.5% for 2016 onwards as the charter rates are fixed and there are no vessel deliveries planned in the near future. Relatively stable cost base, reflecting the minimal or null exposure to fuel and personnel cost as stipulated in its long-term charter contracts. Annual capital expenditure (capex) of about $28 million mainly to cover dry dock expenses, which we expect to remain relatively stable. We do not expect any immediate newbuilding capex given the oversupply of LNG vessels in the market. Maintenance of a six-month debt service reserve account that remains constant as well as readily available cash to service debt for the next six months. Based on this cash availability and dividend lock up being met, we assume dividend payments of about $130 million per year. Based on these assumptions, we arrive at the following credit measures over 2016-2017:

EBITDA margin of about 80%;A weighted average ratio of adjusted funds from operations (FFO) to debt of 6%-7%; andAn EBITDA interest coverage ratio of 2.0x-2.5x. The outlook on Qatar-based LNG shipping company Nakilat mirrors that on Qatar. It reflects S&P Global Ratings' view of the company's importance to the value chain for the Qatari economy and strategy for LNG, which accounts for about 40% of the country's GDP. We consider Nakilat to be a GRE and see an extremely high likelihood that, in the event of financial stress, the Qatari government would provide timely support for Nakilat's debt service requirements.

Given our opinion that the government will likely extend timely extraordinary support for Nakilat if needed, we consider rating downside to be limited. Over the longer term, we could lower the ratings on Nakilat if we lowered our ratings on Qatar; if we estimated that Nakilat's role was no longer critical to the country's LNG distribution as a result of a change in the government's strategy; or if Nakilat's profitability prospects were to weaken significantly.

We currently see limited rating upside. However, an upgrade could result from an upgrade of the sovereign, if all other factors remain unchanged.