Amend: Fitch Revises ABP Finance PLC's Outlook to Negative; Affirms Ratings
Fitch Ratings has revised the Outlook on ABP Finance PLC's (ABP Finance) senior secured notes and programme ratings to Negative from Stable, while affirming the rating at 'A-. ABP Finance is a financing vehicle of Associated British Ports (ABP), which is UK's largest port-owning and operating company. ABP operates under an issuer-borrower structure with ABP Acquisitions UK Ltd (ABPA) as the borrower and ABP Finance, the issuer.
The affirmation reflects ABP's strong and resilient landlord business profile and creditor - protective structure, albeit weighed down by high leverage. Five-year average Fitch-adjusted net debt/EBITDA is 7.2x in Fitch's rating case.
The revision of Outlook reflects pressure on our five-year leverage forecasts, due to recent volume underperformance and the potential impact of Brexit over the next few years. Following the Brexit vote, Fitch has revised downward its U. K. GDP growth forecast to 0.9% from 2% for 2017 and 2018. This lower forecast, together with recent sterling depreciation, is expected to negatively impact volumes at ABP, particularly in the short-term as the U. K's trade flows have a predominance of imports over exports.
ABP's ratings can be compared to those of DP World Limited, a large, well - diversified ports group (BBB/Positive) which has net debt/EBITDA of 4.3x. However, unlike ABP which fully owns its assets, DP World's portfolio is mainly concession-based. Additionally, it does not have recourse to material rental income, minimum guaranteed volumes, or co-investments with tenants in major capex projects and its debt structure has weaker structural protection, thus justifying the rating difference.
Revenue and EBITDA grew 3.4% and 2.9% respectively in 2015, above Fitch's rating case expectations of 2.2% and 2.7%, despite volume underperformance. Tonnage was down 2.6% (ex-coal up 4%) while passenger volumes were up 1.2%, which was slightly below our rating case expectations.
In 1H16, tonnage was down 3.7% and revenues were down 2.6% yoy, again driven by underperforming coal volumes. While ABP also made cost reductions in 1H16 with operating costs down 3.5% yoy, Fitch expects EBITDA in 2016/17 to continue to under-perform.
KEY RATING DRIVERS
Diversified, Resilient Port Network: Revenue Risk - Volume: Stronger
The dominant market position of ABPA in a captive island market, its diversity - both in terms of client-base and geographical spread - and the strategically sound location of its facilities near key industrial underpins its stable and resilient volumes.
Volume Guarantees and Flexible Tariffs: Revenue Risk - Price: Stronger
ABPA's "landlord" business model features protective contractual arrangements with key customers and price flexibility. This enables them to minimise volatility related to operating risk, which leads to fairly stable cash flow comprising mostly contracted payments. Customers are strategically 'locked in' by joint project investments on or near ABP land; as of end-June 2016 about 40% of revenue is either contractually fixed or subject to minimum guarantees.
Significant Co-Investments with Tenants: Infrastructure Development /Renewal Risk: Stronger
ABPA has significant planned capex over the next five years. However, capex risk is substantially mitigated by its detailed capex and maintenance planning, strict criteria for engaging in growth capex projects, significant co-investments with customers, and the straightforward nature of maintenance of its port facility assets.
Refinance Risk Well-Managed: Debt Structure: Midrange
ABP's debt is senior, secured, fixed-rate and covenanted. However, the presence of bullet debt creates some refinance risk, although this is substantially mitigated through diversified maturities, ABP's full and freehold ownership of its assets, as well as a demonstrated track record of regularly accessing banks and capital markets for refinancing. The presence of significant derivatives mark-to-market, some of which is super-senior creates additional leverage as per Fitch's adjusted calculations.
Financial Metrics: Leverage Remains High
ABPA had fairly high leverage over its early years, although this is decreasing in line with Fitch's expectations. Performance in 2015 / 1H16 was in line with our rating case in terms of Fitch-calculated net debt/EBITDAR (under 7.5x), and Fitch-adjusted annuity debt service coverage ratio (synthetic DSCR: over 1.6x).
-The ratings may be downgraded if ABPA makes any acquisitions that materially increase cash flow volatility or if ongoing infrastructure development projects suffer significant cost or time overruns, which in turn could affect ABPA's revenue growth.
-The ratings could also be downgraded if projected five-year average Fitch-adjusted net debt/EBITDA rises above 7.5x or synthetic DSCR falls below 1.6x in our rating case.
-Fitch does not expect to upgrade the ratings in the short - to medium-term unless ABPA materially deleverages during this period.