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NCIG Senior Secured

Why we like the NCIG 27s and NCIG 31 senior secured bonds?

The two announcements below mean NCIG can accelerate its debt amortisation which bodes/benefits senior secured debt holders directly considering potential high debt costs and challenging funding markets for coal related issuers. While the additional toll charge varies depending on coal prices, we understand NCIG could collect more than US$1bn for debt amortisation which will materially help manage refinance risk.

Currently, the US$500m 4.40% September 2027 and US$450m 4.70% May 2031 bonds are trading almost 2% above the BBB corporate curve. In our view, this is materially mispriced, considering the recent strength of thermal coal markets. NCIG has a very strong structure with toll charges designed to fully cover all finance and operating costs. NCIG has already implemented a new committed undrawn bank debt to cover 120m maturing in 2022. The next maturity is US$315m in 2023 which helps in relation to refinance risk.

US$ Equivalent

Sub Bank debt – 650m (Various maturing between 2023 and 2028)
USPP – 415m (Various notes maturing between 2022 and 2025 – new committed undrawn bank debt was established to cover 120m maturing in 2022)
144a/Regs – 950m (500m 4.4% Sept 2027, 450m 4.7% May 2031)
Fixed HITRS – 210m (12.5% Aug 2031 – call Mar 2027)
HIPRS – 268m (16% perp, 13.90% perp, 13.95% perp – call March 2027)
Total 2,493m

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 in 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/Positive from S&P. The junior financings (i.e., HIPRS and HITRS) have BB- ratings (being upgraded from B+) from S&P.

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 all 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.