OREANDA-NEWS. Fitch Ratings has downgraded Russian group port operator, Global Ports Investments Plc's (GPI) Long-term Foreign and Local Currency Issuer Default Ratings (IDRs) to 'BB-' from 'BB'. The Rating Outlook has been revised to Negative from Stable. A full list of ratings follows at the end of this release.

The downgrade reflects the greater than expected decline in traffic in H1 2016 of 22% versus Fitch's forecast of an 8% decline for 2016 in the agency's previous rating case and a 2% contraction of the Russian container market. Fitch believes GPI's price-over-volume strategy resulted in the traffic loss of both large and smaller shipping companies to cheaper terminals. Consequently, Fitch expects YE 2016 leverage to rise to 4.5x from the agency's 3.5x rating case expectation and significantly above Fitch's downgrade sensitivity of 3.0x. The Negative Outlook considers the potential increase in competition in the Russian container market as well as the growing uncertainties on the tariff framework in the Russian port sector.

Fitch's revised rating case forecast anticipates a 20% decline in 2016 container volume followed by a further 5% decline in both 2017 and 2018. Other business lines are assumed to grow at 0%. Fitch also assumes a 2% and 5% decline in prices (revenue per TEU) as GPI may need to reassess its pricing strategy to protect market share. This results in a three-year average leverage to rise to 5.1x from the previous 2.9x rating case.

In contrast Fitch's base case assumes container volume growth of 2% from 2018 onward and 2% bulk cargo handling in 2017 and 2018. Other assumptions remain substantially the same as the rating case. Base case three-year average leverage rises to 4.4x from 2.3x. Fitch recognises that the agency's rating case expectations are conservative and potentially reflective of a greater than one notch downgrade. Fitch's rating action takes this into consideration and also factors in GPI's different view on revenue evolution.

Fitch assesses the group consolidated credit profile at 'BB'. GPI's rating, the holdco, is notched down one level to 'BB-' to reflect the ring-fencing features included in some subsidiaries' bank financing. These ring-fencing features, namely financial covenants at single borrower level, prevent GPI's rating from being aligned with Fitch's assessment of the consolidated profile of the group.

RATINGS OF THE BONDS

Fitch has also downgraded to 'BB-' from 'BB', the senior unsecured rating of RUB15 billion notes issued by First Container Terminal (FCT), a fully-owned subsidiary of GPI. The Rating Outlook is Negative. The rating of these notes is aligned with GPI's Long-Term IDR, which provides a public irrevocable offer to repurchase the notes in case of non-payment of interest or principal.

Fitch has also downgraded to 'BB' from 'BB+', USD350 million notes issued by Global Ports (Finance) PLC. The Rating Outlook is negative. The rating of these notes reflects the agency's assessment of GPI's consolidated credit profile as the unconditional and irrevocable guarantee from the three major opcos give bondholders full and unconditional access to group cash flow generation.

KEY RATING DRIVERS

Volume Risk: Midrange -- Primary Port of Call in a Competitive Environment:

Despite the harsh volume contraction of 1H16, GPI still remains the largest player and primary port of call in the Baltic basin (50% market share) and in the overall Russian container market (35% market share). Nonetheless, Group price-over-volume strategy is reducing GPI's competitive position, especially in the current economic environment where port operators have high spare capacity and flexible tariff policies. The competitiveness of the Group may be jeopardised further if the newly built terminal, Bronka, implements an aggressive pricing strategy to gain market share. Bronka's volumes were modest in 1H16 (13k TEU in 1H16) but should grow over the near/medium term as the port can accommodate large modern ships.

Price Risk: Midrange -- Price Flexibility but Regulatory Uncertainty

Tariffs are currently market-based and have steadily increased over 2010-2015. Almost all of GPI's tariffs and revenues are in USD and collected directly in USD or at an equivalent amount in roubles. The rouble share of revenue is used to pay costs denominated in local currency with the remainder converted into USD.

Over the summer, the Russian Federal Antimonopoly Service (FAS) developed a draft methodology in respect to tariffs to be charged for stevedoring and storage services. The methodology contemplates the introduction of maximum allowed tariffs, calculated in Russian roubles and applicable from 1 January 2017, if approved by government. There is limited visibility on whether tariff caps will apply ultimately and what form they will take. Should caps on tariff be re-introduced, Fitch may reassess the Price risk attribute.

Infrastructure Development & Renewal: Stronger -- Low Capacity Utilisation

GPI invested heavily in terminal upgrades between 2008 - 2013. These investments brought group capacity to more than 4 million TEU, a level sufficient to accommodate increasing volumes in the future. On-site connecting infrastructure is well developed and does not require upgrades. The company envisages spending around USD25 million per year in 2016-20 on maintenance out of operating cash flows. The presence of APM Terminals, one of the world's largest terminal operators, as a shareholder brings operational expertise and mitigates the risk of cost overruns on capital spending.

Debt Structure: Midrange -- Hold-Co/OpCo Structure With full USD-Denominated Debt

The hold co (GPI) is currently free of debt. Bank debt is raised at the Russian opcos. The overall group debt structure is largely fixed rate, fully USD-denominated post swap, largely covenanted with cross default and change-of-control clauses. Financial covenants set both at the opcos and consolidated levels. Foreign currency risk on overall debt is naturally hedged as tariffs are set in USD. Lack of committed liquidity lines is a weakness, which the cash buffer held on balance sheet only partly mitigates. According to Fitch's liquidity analysis, under the rating case, group debt maturities are covered until end-2019.

Fitch believes the presence of APM Terminals, a well-reputed sponsor with a strong but informal commitment to GPI, is a supporting factor in GPI's refinancing process. A potential change in GPI's ownership may affect Fitch's assessment of the refinancing risk. The agency also view's GPI's listing on the London Stock Exchange is a positive factor that gives GPI additional financial flexibility.

Debt Service -- Rising Leverage on Underperformance

Under the revised Fitch rating case, the agency expects GPI's leverage to reach 4.5x at YE16. Fitch's rating case uses more conservative assumptions than management on volumes, tariffs and capital spending, interest rates and dividends received from joint ventures. As a result, Fitch expects leverage to remain above the 5x mark over 2017-2019 period. The rating case does not factor in any shareholder distributions, in line with GPI's stated zero dividend policy. A sensitivity stress on a hypothetical 30% rouble appreciation shows that, under this scenario, projected leverage will increase further by ca. 1x each year.

Peers

GPI and Deloports have the same rating ('BB' Cons/IDR 'BB-'). GPI is much larger than Deloports, has a dominant position in the Russian container market and more transparent corporate governance (GPI is Listed on LSE). Deloports, however, has much lower leverage (ca. 1.5x) than GPI (4.5x exp) and has a more balanced export/Import mix with grain exports partially offsetting the import oriented container business. Mersin ('BBB-'/Stable Outlook) is similar in size than GPI and, like GPI, plays a dominant role in its home market. Mersin's cargo import and export mix is more balanced than GPI, which is more exposed to the Russian recessionary environment. Mersin's current lower leverage supports its higher rating.

RATING SENSITIVITIES

Future development that could lead to negative rating actions on both GPI, FCT and the GPI Finance notes include:

--Fitch-adjusted GPI's consolidated debt/EBITDA remaining above 5x over 2017-2019 period in the Fitch rating case.

--Adverse policy decisions - such as the introduction of a tariff cap - or geopolitical events affecting the port sector.

- A change in shareholder structure with the co-controlling shareholder APMT disposing partly or entirely its stake in GPI, which may affect our analysis of some rating factors such as refinancing risk and potentially GPI's ratings

The Outlook could be revised to Stable if GPI's leverage is firmlyy on a downward path with Fitch-adjusted net debt-to-EBITDA falling below 4x over a three-year horizon

FULL LIST OF RATING ACTIONS

Fitch has downgraded the following:

Global Ports (Finance) PLC

--USD350m senior unsecured notes due January 2022 to 'BB' from 'BB+'; Outlook Negative.

Global Ports Investments PLC

--Long-Term Foreign and Local Currency IDR to 'BB-' from 'BB'; Outlook Negative.

JSC First Container Terminal

--RUB5bn senior unsecured notes due December 2020 to 'BB-' from 'BB'; Outlook Negative;

--RUB5bn senior unsecured notes due February 2021 to 'BB-' from 'BB'; Outlook Negative;

--RUB5bn senior unsecured notes due March 2021 to 'BB-' from 'BB'; Outlook Negative.

SUMMARY OF THE CREDIT

GPI is largest Russian container port operator (35% market share in 1H2016) with a strong presence in the Baltic Sea basin (50% market share) and a solid footprint in the Far East (31% market share).