Last week, Newcastle Coal Investment Group (NCIG) was upgraded to BBB+ (from BBB) by S&P.
The USD senior secured bonds remain very cheap relative to other investment-grade AUD BBB bonds. As such, we believe there is still capacity for the USD bonds to outperform from here. Investors could also look at the Port of Newcastle (PONEIV) curve if they would like access to a more diversified terminal across several commodities (rather than coal-specific).
The upgrade reflects the additional coal-price linked tolling charges which support a higher minimum base case debt service coverage ratio (DSCR) of 1.82x. NCIG is still assessing how it will allocate the additional toll charges (which equate to around US$200m pa) for debt amortisation, but potential bond buybacks will also be considered. This would be credit positive.
Investment-grade AUD BBB bonds
Source: Bloomberg
Recent developments, including additional variable toll charge, BHP’s commitment to 2030, and associated S&P rating action
NCIG has implemented an additional variable toll charge, applicable only in higher coal price scenarios, to enable earlier debt amortisation. The additional toll charge varies depending on coal prices, with the maximum level at US$3/t. This is separate to the finance toll charge cap of ~US$7.5/t (current financing toll charge is ~US$3.7/t). As toll charges are based off contracted capacity rather than shipped volumes, this would translate into an additional US$200m pa for debt amortisation.
BHP, a shareholder/shipper at NCIG through its wholly owned subsidiary Hunter Valley Energy Coal Pty Ltd, announced in June 2022 its intentions to retain ownership of the Mount Arthur coal mine and continue operating it until 2030. At this point it will cease operations. Under the terms of the Ship-or-Pay Agreement (SoPA), if a customer elects not to renew a contract, the customer will be under an obligation to repay its share of the NCIG outstanding debt. Junior financings are protected as there will be a triggering of a mandatory acceleration of BHP’s repayment of its share of the NCIG outstanding debt ahead of the closure date. This would translate to BHP paying NCIG an additional US$550m until 2030.
The more likely scenario is that there are plenty of other shippers that can take up BHP’s share of capacity – and will inevitably do so – probably in the leadup to the 2030 BHP closure of their mine. There is a remarketing strategy for the HIPRS in 2027 – so that will likely be the catalyst for this to occur.
In consideration of the positive developments above, NCIG senior debt is now rated BBB+ from S&P. The junior financings HITRS have BB- ratings and HIPRS is unrated.
What does the mean from a financial context?
From a financial perspective, this means there is more room for NCIG to enable earlier debt amortisation. The additional toll charge varies depending on coal prices and is not fixed. However, if you assume NCIG can generate an average of US$1.5/t (or 50% of the maximum level of US$3/t) over the next 10 years then NCIG will generate over US$1bn for debt amortisation. This would be sufficient to refinance the senior secured bond debt (US$500m 4.4% September 2027 and US$450m 4.70% May 2031) by FY31. The junior financings could then be repaid post FY31.
