Ratio Energies (Finance): How Much Is The Pledged Royalty Really Worth In Stress
The main article argued that the pledged royalty at Ratio Energies (Finance) is an emergency backstop, not a running source of debt service. This follow-up isolates why: the royalty only starts paying after a trigger, sits behind more senior payment layers, and is capped at the remaining debt.
What This Follow-Up Is Isolating
The main article already argued that Series D really depends first on Ratio Energies' ability to repay the Back-to-Back loan, and only second on the pledged royalty. This follow-up isolates the narrower question: if a real stress scenario arrives, how much is that collateral actually worth to bondholders.
The reason this deserves its own piece is simple. A "12% royalty" sounds like a direct claim on Leviathan. In practice, the mechanism is much tighter and much less generous: the legal right exists, but the cash is delayed; the collateral is real, but it sits behind more senior layers; and the remedy is defined in advance and capped.
As of December 31, 2025 and at the date the statements were approved, no grounds existed for immediate repayment or security realization, and the partnership was in compliance with its obligations to the company. So the issue here is not whether the collateral is already in the money. The issue is how it is built for the moment when the normal debt-service path stops working.
The First Trigger: The Royalty Does Not Service The Bond In Normal Times
The agreement gives the company a royalty right as soon as the loan is extended to the partnership, but that is only the legal layer. Actual cash proceeds from the royalty are meant to flow only if the loan, principal plus interest, is not repaid by the final maturity date, or if an acceleration event occurs, whichever comes first. That is the critical distinction: the royalty is not another stream of cash running alongside the amortization schedule. It turns on only after the regular servicing path breaks.
That matters even more because the bond schedule has its own clear rhythm. Series D carries 5.7% annual interest plus an additional 1% on the unpaid balance, interest is paid twice a year, and principal is amortized every October 31 through 2029. As long as that path keeps working, bondholders are living off the partnership's loan repayments, not off the royalty.
| Layer | What already exists | What still does not happen |
|---|---|---|
| Legal right | The royalty has been granted and pledged | There is no automatic royalty cash flow |
| Normal servicing path | The partnership pays principal and interest to the company, and the company pays the bond | The royalty does not participate in ongoing debt service |
| Stress path | The loan can be accelerated if the bond is accelerated | Only then does actual royalty collection become relevant |
The most misleading word in a superficial read is "immediate." The company is entitled to the royalty immediately, but that entitlement is not the same thing as immediate cash. What starts right away is the lien. What starts later is the cash flow.
Payment Waterfall: Who Gets Paid Before Bondholders
This is where the collateral takes its real economic shape. Even after the trigger is activated, the royalty is not paid out of Leviathan gross revenue. It is paid out of the partnership's income from gas and oil produced and utilized from Leviathan, and only after three prior layers: state royalties and any levy or charge required by law, overriding royalties to the general partner and to Eitan Eisenberg Ltd., and current payments to financial institutions that have provided or will provide financing for Leviathan's development.
That is the core point. Bondholders do not have access to the field's gross cash generation. They have a right that sits behind the state, behind the overriding royalties, and behind the senior financing layer above Leviathan's development. The real value of the collateral in stress therefore depends much less on the headline "12%" and much more on how much cash is left after everything ahead of it.
| Priority | Who gets paid first | What it means for bondholders |
|---|---|---|
| 1 | The state and any levy or charge imposed by law | The pledged royalty is not a claim on gross revenue |
| 2 | The overriding royalty holders | Even inside the rights stack around the field, other claims rank ahead of the bond |
| 3 | Current payments to Leviathan development financiers | The royalty is effectively subordinated to the field's senior financing burden |
| 4 | Only what remains can flow into the pledged royalty | This is a late recovery layer, not a first line of defense |
That is also the difference between asset-backed credit and credit with a residual right over an asset. Ratio Energies (Finance) is much closer to the second category. The collateral is real, but it is not first in line to the cash box.
What The Collateral Does, And What It Does Not Give Bondholders
The documents are actually very clear on this point. The royalty is paid in cash, once a month, in dollars, and it is calculated by reference to the wellhead price and only to gas and oil produced and utilized from Leviathan from the trigger date onward. But the right to receive cash under the royalty is limited to the remaining bond principal, the interest, default interest, and additional amounts the partnership owes the company under the loan agreement. Once that amount has been fully paid, the royalty expires and is cancelled.
So even in a successful recovery scenario, there is no participation in Leviathan's value beyond the debt claim itself. Bondholders are not getting an open-ended option on the field. They are getting a recovery mechanism that covers a defined debt amount and then switches off.
The sharper implication appears at the end of the same section: other than the interest-reserve accounts, the loan is not secured by any additional collateral from the partnership, and the collateral, remedy, and sole recourse in a failure to pay at final maturity or upon acceleration are the royalty. The company has no claim right against the partnership in that scenario. This is not a technical footnote. It is the center of the structure. If debt service breaks, the company does not open a broad litigation path against the partnership. It gets locked into one defined and limited collection route.
The other pledged account, the interest reserve, leads to the same conclusion. At year-end 2025 it held about $2.3 million, equal only to the next interest payment. That is useful protection for maintaining the next coupon, but it is not a principal cushion, and it does not replace the royalty in a deeper credit event.
This chart is not a legal waterfall. It is a scale comparison. The gap is obvious: the interest reserve covers the next coupon, while the remaining undiscounted contractual cash flows still owed to bondholders stand at about $19.7 million within one year, about $25.0 million in one to two years, and another $47.6 million in two to five years. Anyone reading the interest reserve as broad protection is overstating what it really is. It is mainly a short bridge between coupon dates, not a meaningful rescue layer.
There are also technical adjustment mechanisms, for example in a partial early repayment or a partial sale of Leviathan rights, but they preserve proportionality. They do not change the central fact: the trigger still arrives late, the payment still sits inside a subordinated waterfall, and the remedy remains capped.
Why Even The IFRS 9 Work Does Not Treat The Royalty Like Cash
The IFRS 9 memorandum does give the collateral some credit. It states that the royalty right for Series D is 12%, calculated against 10% of Leviathan, and that the registration of the royalty and its pledge in the Petroleum Book on August 5, 2021 reduced the risk embedded in receiving that royalty. On that basis, the parameter reduces the allowance rate.
But the document stops exactly where it should. It does not say the royalty eliminates risk. It says it lowers it. In the same section, the memo also says that most of the impact on the allowance rate comes from the broader macroeconomic picture, industry risk, and country risk, while the specific effects are a much smaller fine-tuning layer. That is an important read: even inside the accounting work, the royalty is a mitigating factor, not a mechanism that erases risk.
The analytical implication is straightforward. If even the allowance model, which is willing to give credit to registered collateral, does not treat it as a full substitute for the credit quality of the ultimate borrowers and the operating environment, there is no reason for investors to make that leap on their own. The royalty strengthens the recovery structure. It does not make debt service equivalent to a senior claim on Leviathan's net cash flow.
Bottom Line: Real Collateral, But Reserved For A Tail Scenario
The pledged royalty at Ratio Energies (Finance) is not fictional. It was granted, pledged, clearly defined, and anchored in a specific calculation mechanism. So anyone arguing there is nothing here is overstating the case in the other direction.
But in stress, the real question is not whether collateral exists. It is when it turns on, what cash base it sits on, and how much freedom of action it leaves bondholders. On all three tests, the answer is much more conservative than the headline suggests. The royalty starts paying only after a breakdown in the normal servicing path or an acceleration event. It is paid only after more senior layers. And it is limited to the debt claim, without a broader right of action against the partnership.
That is why the true economic value of the collateral is that of a late and limited recovery mechanism, not an additional debt-service engine. As long as Leviathan keeps working and the partnership keeps paying, that distinction stays hidden. In a real stress case, it becomes the whole thesis.
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