Ratio Finance in the First Quarter: Leviathan Shutdown Hit Results, Covenant Headroom Stayed Wide

The first quarter for Ratio Finance looks weak if it is read through Leviathan: a 33-day shutdown cut production, field-level revenue fell sharply, and the partnership's EBITDA was almost halved from the comparable quarter. But that is not the whole bondholder story. The issuer itself is a dedicated debt conduit, so the practical question is whether the operational shock has already reached debt service, the expected-credit-loss model, or the covenants. As of the end of March and the approval date of the financial statements, the answer is still no: the expected credit loss allowance stayed at $468 thousand, no significant increase in credit risk was identified, and FLR and DSCR remained far from breach levels. That does not make the quarter good. It means the risk has moved from the quarterly P&L itself to three near-term proof points: production continuity after the April restart, completion of the transmission segment in June, and the ability to turn new contracts, especially Dalia, into revenue without further financing and infrastructure delays.

Company Background

Ratio Finance is not a normal operating energy company. It is a single-purpose SPC created to raise debt and lend the proceeds back-to-back to Ratio Energies. The economic activity that services the debt is not inside the issuer itself. It sits in the partnership's 15% interest in the Leviathan reservoir.

That means every Ratio Finance filing needs to be read through two layers. The first layer is an almost symmetric balance sheet: a loan to the partnership against bonds, interest receivable against interest payable, and very little independent activity. The second layer is the real risk: whether Leviathan produces, sells, collects, funds expansion, and transfers enough cash for debt service.

This also continues the prior annual analysis. The conclusion then was that the bond rests on Leviathan, while the pledged royalty is mainly an emergency backstop. The first quarter did not contradict that. It sharpened the point: even when the reservoir stopped for 33 days, the accounting model and the covenants did not yet enter stress, but dependence on a single asset and on transmission infrastructure became more tangible.

The Quarter Hit Leviathan, Not the Issuer's Accounting Mechanism

The main event in the quarter was the shutdown of Leviathan production from February 28, 2026 until production resumed on April 2, 2026. The operating effect is clear: the investor presentation shows natural gas production falling from 2.9 BCM in the first quarter of 2025 to 1.9 BCM in the first quarter of 2026, while revenue fell from $95 million to $54 million.

The sharper point is not only the production decline. The average price fell from $5.85 per MMBtu in the comparable quarter to $5.19, so the quarter absorbed both lower volume and a lower average price. EBITDA fell from $64 million to $32 million, and the partnership's net profit fell from $36 million to $18 million.

At the issuer level, however, the income statement barely moved. Interest income from the partnership and interest expense on the bonds were both $1.215 million, while expense reimbursement from the partnership covered general and administrative expenses. Total comprehensive profit for the period was zero. That is not evidence of an intrinsically stable business. It is a reminder that the issuer's P&L barely absorbs operating volatility as long as the loan continues to be serviced on schedule.

The important accounting finding in the quarter is that the expected credit loss allowance on the loan to the partnership stayed at $468 thousand, exactly where it stood at the end of 2025. The company also determined that no indicators of a significant increase in credit risk had emerged through March 31, 2026, so the allowance continued to be measured on a 12-month expected-loss basis. A weak operating quarter was not enough to move the IFRS 9 risk classification.

Bank Deferral Bought Time and Covenants Stayed Far From Stress

The more interesting part of the filing is not Ratio Finance's zero profit, but what happened at the partnership funding layer. On March 31, 2026, the partnership drew another $150 million from the bank facility, bringing drawn amounts to $600 million at quarter-end. After the balance sheet date, on April 9, the bank consortium agreed to defer the first two principal payments to October 15, 2026 and extend the utilization period of the facility by six months. On April 10, the partnership repaid $150 million, so by the approval date of the financial statements the drawn amount was $450 million and the available facility stood at $150 million.

That move eases the transition period for the expansion. It does not remove Leviathan's funding needs, but it lowers near-term pressure around the start of amortization and restores some flexibility within the facility. For the issuer's bondholders, this matters because the company's primary payment source is repayment of the loan by the partnership, not independent cash at the issuer.

The table explains why the filing did not create a sharp credit signal despite a weak Leviathan quarter. FLR declined from 28% at the end of March to 21% near approval of the financial statements, far from the 65% ceiling. Backward DSCR declined from 5.07 to 4.67, but it remains far above the 1.05 floor. As long as these metrics remain in this area, the immediate stress thesis for the bond is weaker than the quarter's operating headline.

Still, this is not unlimited protection. The bank loan carries floating TERM SOFR plus a margin of 2.7% in the first four years, 3% in the fifth year and 3.25% in the sixth year. The partnership has entered into rate hedging transactions, but Leviathan expansion still requires CAPEX, guarantees, transmission infrastructure, and an ability to service payments if shutdown events recur.

The Dalia Contract Adds Visibility, But Part of the Volume Still Depends on Financing

The positive trigger after the balance sheet date is the gas supply agreement with Dalia Energy, signed by the partnership and NewMed Energy, without Chevron. The agreement is intended for two new combined-cycle power plants of about 850 MW each. It includes firm annual supply of about 1.3 BCM, increasing to about 1.7 BCM from 2034 or 2035 through the end of the agreement. Supply is expected to begin on January 1, 2030, and total 100% revenue may amount to about $6.7 billion, with the partnership's share at about $1.66 billion.

The agreement improves long-term visibility, but it is not 2026 cash. Completion is subject to Israel Competition Authority approval if required and approval by the project companies' financiers. More importantly, if financial close for the Eshkol Avshal facility is not completed by June 30, 2027, the sellers may reduce up to 50% of the volumes attributed to that facility. If financial close is not completed by December 31, 2027, each party may reduce that portion of the quantity. The contract therefore adds a demand anchor, but a meaningful part of the quantity still depends on the customer's project reaching financing.

The pricing mechanism also matters. The gas price is indexed to the general uniform electricity tariff, with a price review mechanism from October 1, 2041 for a 90-day period and an adjustment capped at 10% up or down. If the parties do not agree on a price update, the party that requested the update may reduce the daily contract quantity by up to 30%. The buyer also received a one-time option to update the pricing mechanism in the existing Eshkol 1 agreement, a change the partnership estimates may reduce its revenue by an immaterial amount.

Transmission is not fully closed either. In May, the Ashdod-Ashkelon segment received an additional budget approval of about $4.4 million on a 100% basis, with the partnership's share at about $0.7 million. The approved total budget reached about $143 million, with the partnership's share at about $21.5 million. Completion and gas flow are expected during June 2026. This is not an amount that threatens the balance sheet, but it is a reminder that the value of export and supply contracts passes through pipelines, approvals, and timelines.

Conclusions

The first quarter gives a mixed but clearer read: Leviathan suffered operationally, and a 33-day production loss cannot be ignored, but Ratio Finance's credit risk has not yet moved to a different phase. There was no change in the expected credit loss allowance, no warning sign requiring a projected cash-flow disclosure, and the partnership covenants remained comfortably away from their thresholds. That is the reassuring part.

The less clean part is that the financial comfort rests on time and infrastructure. The bank deferral gives the partnership more room until October 2026, the Dalia contract adds visibility from 2030, and the combined segment is expected to start flowing in June. Those three items need to become continuous production, actual flow, and customer financing. Otherwise the first quarter will be remembered less as a temporary event and more as a reminder that the bond rests on one sensitive chain. The proof points for the next quarters are production continuity after April, completion of the combined segment, FLR and DSCR staying far from breach levels, and practical progress in the Dalia contract beyond the agreement headline.