S&P: Novorossiysk Commercial Sea Port Affirmed At 'BB-','ruAA-' On Refinancing, Planned Taman Port Investment; Outlook Stable
At the same time, the 'ruAA-' Russia national scale rating was affirmed.
The affirmation primarily reflects the fact that NCSP has successfully refinanced its US$1.5 billion loan from Sberbank with a new one from VTB Bank, which has had a positive impact on its liquidity. The company has also concluded a memorandum of understanding with Rosmorport, Russia's port authority, to receive a controlling share in the port of Taman in exchange for investing up to Russian ruble (RUB) 35 billion (about US$543 million) into the development of the port over the next few years. Given NCSP's appetite for dividends, we believe that the company may primarily finance its Taman port investments with debt, leading to higher leverage.
We believe that NCSP's liquidity has improved since it refinanced its Sberbank loan in July, and that its liquidity is now adequate. This primarily stems from the much more comfortable maturity profile, which decreased from US$350 million per year to US$200 million. Lower debt payments leave the company with higher cash flows and provide a cushion against underperformance or unexpected cash outflows. Additionally, we calculate that the covenant headroom under the new loan is much greater, with a lower risk of covenant breach than was the case under the previous loan. We therefore have revised our liquidity assessment for NCSP to adequate from less than adequate.
At the same time, we believe that NCSP's commitment to participating in the development of Taman port could result in increased leverage for the company. NCSP plans to have Taman port specialize in bulk cargoes, and leave Novorossiysk port a hub for containers, grains, and liquid cargoes. In June 2016, NCSP signed a memorandum of understanding with Rosmorport to proportionately invest up to RUB35 billion (about US$543 million) in exchange for the controlling share in the project, which is estimated to fully cost about RUB65 billion (about US$1 billion).
We estimate NCSP's current investment plans at about US$100 million per year or about US$500 million over the next five years. Participating in the Taman project could drive this number to more than $1 billion over the next five years and may require debt financing, despite the company's strong cash flow generation capacity.
In our view, most of the free cash flows could be paid out as dividends and NCSP's target for dividends of up to US$100 million per year can be exceeded, as the recent announcement of US$140 million (RUB9 billion) in interim dividends for the second quarter of 2016 suggests. Reflecting the risk of higher leverage at NCSP, we are revising our assessment of its financial policy to negative.
On top of NCSP's strong operating performance over the past two years, its cash flow generation has been bolstered by favorable foreign exchange rate dynamics, because the Russian ruble has depreciated against the U. S. dollar since 2014 on the back of the decline in oil prices. NCSP generates revenues in U. S. dollars (its tariffs are set in this currency) and its operating costs are in rubles, given that all of its operations are in Russia. This allowed the company to grow its reported EBITDA margins to above 80% and meaningfully improve its financial metrics to levels we see as commensurate with a significant financial risk profile.
The Russian Federal Antimonopoly Service (FAS) has recently proposed bringing back tariff regulations--or at least some form of tariff control--for the Russian stevedoring industry from as early as 2017. The proposals currently in discussion include conversion of tariffs at ports into rubles and controlling margins for stevedoring companies. We are not currently factoring into our forecast on NCSP any potential effects of regulatory changes for the industry, since the timing and the magnitude of such changes are still uncertain.
The stable outlook reflects our expectation that NCSP will be able to manage its debt amortization by controlling its development program and dividend distributions. We also expect that the company will continue to benefit from its favorable cost position and maintain its reported EBITDA margins above 60%. We see NCSP's ratio of FFO to debt in the range of 20%-30% as commensurate with the current rating. The stable outlook does not incorporate any potential effects of tariff regulation currently being discussed by the Russian government.
We could lower the rating on NCSP if our adjusted FFO-to-debt ratio were to fall to less than 20%. This could be driven by a meaningful decline in the group's cargo turnover or negative tariff adjustments, in particular resulting from the government's potential decision to restrict margins at Russian ports or any other form of regulation. We could also lower the rating if we see the company's liquidity position weakening due to less cash being available for debt repayment than we anticipate. Unexpected dividend distributions, higher development expenses, or weaker performance could be among the reasons for revising down the liquidity assessment. Insufficient covenant headroom would also have a negative effect on our assessment of liquidity.
We could raise the rating if the group maintained an adjusted debt-to-EBITDA ratio below 3x and an adjusted FFO-to-debt ratio above 30% on a sustainable basis. An upgrade could be possible after the government finalizes its view on tariff regulation in Russian ports and we can estimate the impact of regulation on NCSP's operations. Better visibility on NCSP's future ownership and business structure, particularly regarding the government's longstanding plan to sell its 20% direct stake, is an additional factor we would consider before raising the rating.