Fitch Ratings has affirmed EIG Pearl Holdings S.a r.l.'s (Pearl) senior secured notes and Issuer Default Rating (IDR) at 'A'.
The Outlook is Positive.
RATING RATIONALE
The ratings and Outlook are based on the contractual structure between the issuer, AssetCo and the Saudi Arabian Oil Company (Saudi Aramco; A/Positive).
AssetCo owns usage lease rights to a stabilised crude oil pipeline network in Saudi Arabia. Saudi Aramco owns the remaining 51% of AssetCo, operates the pipeline network and pays a tariff for its usage. This structure means Pearl's ratings are linked to Saudi Aramco's rating rather than being driven by Pearl's financial metrics, which Fitch views as adequate.
KEY RATING DRIVERS
Stable and Predictable Cash Flow - Revenue Risk: Stronger
AssetCo has entered into a 25-year usage lease agreement (ULA) with Saudi Aramco regarding a network of oil pipelines in Saudi Arabia. AssetCo has contracted the pipeline usage rights back to Saudi Aramco under the transportation, operations and maintenance agreement (TOMA), coterminous with the lease.
Under the TOMA, Saudi Aramco pays AssetCo a defined tariff, subject to fixed escalation of 2% a year, for volumes up to the minimum volume commitment (MVC) and USD0.4546/barrel, indexed at US CPI, for volumes above the MVC and up to a defined maximum throughput volume. The MVC provides a floor for AssetCo's revenue, ensuring stable cash flows to service debt in full for the issuer without exposure to volume, price or operating risks.
The issuer receives revenue in the form of distributions from AssetCo, of which the only risk of suspension is regarding a 'dividend block' event, which we view as unlikely.
If Saudi Aramco stops distributions to its shareholder, Saudi Arabia, it has the unilateral right to reduce or suspend distributions at AssetCo. All non-distributed cash would be trapped at AssetCo to be released upon conclusion of the dividend block. Consequently, a dividend suspension at AssetCo would prevent Saudi Aramco itself from receiving any distributions from AssetCo, while continuing to be obliged to meet its payment obligations under the TOMA.
Immaterial Cost Risk, Proven Technology - Operating Risk: Stronger
The TOMA passes all material operation risks to Saudi Aramco, a financially strong operator with substantial experience operating crude oil pipelines in Saudi Arabia.
Capex Absorbed by Saudi Aramco - Infrastructure Development and Renewal: Stronger
Under the TOMA, Saudi Aramco is responsible for all capex requirements. Any reduction in pipeline capacity will not affect the MVC. The pipelines are critical to the Saudi Arabian economy, creating a strong incentive for their maintenance.
Weak Security Package, Some Refinance Risk - Debt Structure: Midrange
The notes have strong structural features, including being senior secured and fixed rate. Debt amortisation has been structured to closely match the MVC. However, the issuer is exposed to refinancing risk for its remaining bridge bank facility. This is mitigated by the five-year (plus one-year extension) tenor of the bridge, allowing for flexibility in the issuance schedule along with the existing interest-rate hedge and a two-way refinancing spread-balancing agreement.
This refinancing spread-balancing agreement with Saudi Aramco, which is designed to provide support to senior creditors in reasonable credit spread downside scenarios, significantly mitigates the risk of higher credit spreads. Combined with its existing hedging programme, which offers protection against base rate movements, this should ensure the bridge bank facility can be refinanced and subsequent bond issuance can be repaid under reasonable credit-spread downside assumptions. Debt service is further supported by a six-month debt service reserve facility to cover unforeseen temporary interruptions in upstream dividends.
Upon termination of the TOMA and ULA, Saudi Aramco is liable to make a rent refund payment, which is not fixed but is subject to a floor calculated to ensure full repayment of the issuer debt and hedge settlement costs, including breakage costs. Our 'Weaker' assessment of the security package constrains the debt structure assessment, which does not allow enforcement against the pipeline assets, limiting investor control and Saudi Aramco's incentives to comply.
Financial Profile
The Fitch rating case debt service coverage ratio (DSCR) average is 1.04x with a minimum of 1.01x. This low DSCR level under the Fitch rating case is adequate given the transaction's material de-risking. Ultimately, the rating is not driven by the project's financial metrics, but by the transaction's contractual structure and counterparty considerations.
PEER GROUP
The closest peer is Galaxy Pipeline Assets Bidco Ltd (Galaxy; AA/Stable), which has a similar contractual structure. Galaxy also receives revenue based on a fixed tariff and is subject to an MVC, regardless of the actual throughput or availability of the pipelines. All its operating expenditure and capex are passed onto Abu Dhabi National Oil Company through a use-and-operations (U&O) agreement. Similarly, financial metrics do not drive Galaxy's rating, which is instead driven by the contractual structure of the relevant agreements and counterparty considerations.
Abu Dhabi Crude Oil Pipeline LLC (ADCOP; AA/Stable) is the precursor to Galaxy and has similar contractual agreements. ADCOP also receives revenues based on an MVC, regardless of the actual throughput or availability of the pipeline, and all operating expenditure and capex are passed onto a third party through a U&O agreement. The major structural difference between Galaxy, Pearl, and ADCOP is the shareholding structure. Abu Dhabi National Oil Company owns 51% of AssetCo through its 80% owned subsidiary, ADNOC Gas Pipelines HoldCo LLC. ADCOP is fully owned by ADNOC through its subsidiaries. Furthermore, ADCOP entered into the U&O agreement with ADNOC Onshore, a 60% subsidiary of ADNOC. The remaining 40% is owned by international oil majors. ADNOC Onshore funds the tariff payments under the U&O agreement from cash calls to its shareholders. In comparison, ADNOC is the 100% counterparty to the U&O agreement for AssetCo.
ADCOP has slightly lower financial metrics than Galaxy, with average and minimum Fitch rating-case and DSCR of 1.04x and 1.02x, respectively. Ultimately, all three projects relate to assets integral to the ability of the relevant state to maintain its oil and gas production. This is reflected in the contractual structure of the transactions, leading to ratings that are in line with that of Abu Dhabi for ADCOP and Galaxy, and that of Saudi Arabia for Pearl.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to negative rating action/downgrade:
Downgrade of Saudi Aramco's Long-Term IDR.
Failure to refinance the bridge facility in a timely manner.
Additional material amounts of subordinated debt for the issuer may lead to negative rating action on the IDR.
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Upgrade of Saudi Aramco's Long-Term IDR.
Best/Worst Case Rating Scenario
International scale credit ratings of Sovereigns, Public Finance and Infrastructure issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of three notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.
TRANSACTION SUMMARY
AssetCo has lease usage rights regarding a portfolio of 44 stabilised crude oil pipelines covering over 4,000km in Saudi Arabia. The pipelines are owned by Saudi Aramco. The asset portfolio includes pipelines, storage tanks, pump stations, surge skids and pressure reduction stations - 100% of Saudi Aramco's domestic crude oil production flows through these (excluding volumes from Saudi-Kuwaiti partitioned neutral zones). The pipelines supply customers of Saudi Aramco's crude oil production including refineries, power plants and export terminals. As such, the pipeline network is integral to Saudi Arabia's ability to commercialise its oil production.
CREDIT UPDATE
Volumes Transported
Performance was above expectations in 1H22. Over 1Q22, 906 million barrels were transported, which is 60 million above the maximum threshold. Over 2Q22, 938 million barrels were transported, which is 82 million above the maximum threshold. This resulted in a carry-forward carry back balance of around 136 million at the end of 2Q22.
Bridge Loan Refinancing
In October 2022, Pearl refinanced USD1,735 million of the bridge loan. The spread balancing agreement with Aramco provided protection against the increase in credit spreads. After this refinancing, 39% of the original bridge loan has been refinanced.
FINANCIAL ANALYSIS
Fitch's base case closely mirrors the sponsor base case, using the IHS Markit forecast for volumes and following the issuer's management's planned refinancing schedule. The Fitch base case DSCR average and minimum are 1.37x and 1.27x, respectively.
The Fitch rating case assumes transportation volumes equal to the MVC and applies no cost stresses to AssetCo's operating costs, due to the contractual structure, other than a 10% stress to AssetCo's general & administrative costs, which are exposed to cost increases up to a cap. Fitch assumes an interest-rate stress of 0.5% on future note issuances compared with the Fitch base case. The Fitch rating case DSCR average is 1.04x with a minimum of 1.01x.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This 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. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg
SAUDI ARABIAN OIL COMPANY 
