S&P: Terminales Portuarios Euroandinos Paita 'BB' Issue Rating Affirmed; Outlook Still Stable
The rating affirmation reflects our view of the port's good traffic performance and improved efficiency following its expansion in late 2014 and the new port equipment acquired in 2015-2016. Additionally, it reflects our opinion of the asset's fair competitive position. It operates in a volatile industry and its exposure to external factors such as the El Nino climatic phenomenon can significantly affect the project's revenues and are beyond its control.
CONSTRUCTION PHASE: NOT APPLICABLEThe project is no longer exposed to construction risk. TPE finalized investments for Stage 1--the construction of a new berth--in June 2014. The National Port Authority and all relevant regulators had provided final approvals by September 2014.
OPERATIONS PHASE: 'bb'In 2015, TPE's overall operating and financial performance remained above our expectations and consistent with the current rating.
Volumes handled at the port and EBITDA grew about 30% and 31%, respectively, in 2015 compared to 2014. On average this was a 26% positive deviation from our base case. The main reason for the deviation was the increase of the number of containers and solid bulk handed enabled by the opening of the new berth; this new facility performed better than expected. Agro-industrial and hydrobiological products remained the most relevant of those handled by TPE in terms of revenue and volume. In terms of twenty-foot equivalent units (TEUs), by end 2015 TPE reached almost 210,000 (up from 193,000 in 2014).
During the first six months of 2016, we observed a fall in volumes handled--down about 20% compared with the same period in 2015--principally due to the decrease in exports of hydrobiologic products. However, we expect this will be partially offset by an increase in agro-industrial products (such as mango, wheat, and coffee) during the second half of 2016. This reflects that TPE operates in a highly cyclical business that usually has a peak in sales during the second half of the year when the agricultural campaign starts. We expect that by yearend the decrease in total volumes compared with 2015 will have reduced to about 10%, with no significant effect on revenues and still consistent with our forecast operating and financial performance--with a debt service coverage ratio (DSCR) of above 2.0x.
We regard TPE's short - to medium-term traffic fundamentals as sound. Peru's strengthening economy is driving this, including rising GDP during 2017-2018. TPE also stands to benefit from improvements done in the second phase of investments, including additional port equipment. The new equipment has been already incorporated into the port in 2016, all financed with internally generated cash. According to the concession contract, this second stage investment needed to be done when the port reached 180,000 TEUs per year, which was triggered in December 2014. To finalize Stage 2, the project also needs to remove a sunken ship at the port, which is expected to take place by the end of 2016.
Under our base case, we expect container volumes to increase by a yearly average of 8%-10% during 2017-2019, trending toward 3% annual volume growth over the long term.
The operations phase SACP also factors in our assessment of the project's fair competitive position and market risk, with operations in a volatile industry and exposure to factors such as the El Nino climatic phenomenon. Such factors can significantly affect the project's revenues and are beyond its control. Under a market-downside scenario, which considers an El Nino event (which we model as occurring in 2020), we expect cash flows available for debt service to decrease 20%-30% from our base case.
S&P GLOBAL RATINGS OPERATIONS PHASE BASE - AND DOWNSIDE-CASE ASSUMPTIONS
We consider GDP growth, commodity prices, and climatic factors as the main drivers of the port's traffic growth.
We forecast Peru's real GDP to expand by 4.0% in 2017 and 4.5% in 2018. We also expect consumer price index (CPI) of 3.0% for 2017 and 2.7% from 2018, which will influence tariff increases and operating costs (see "Brazil's Weak Economy And Global Volatility Are Clouding Latin America's Credit Outlook," published July 8, 2016).
Our base-case scenario assumes:Volume growth of about 8%-10% for 2017 and 2018, before trending toward 3% long-term traffic growth. An El Nino event occurring in year 2020, in which volumes handled at the port decrease by 15% from our base-case scenario. Tariff increases in line with inflation levels. Operations & Maintenance (O&M) costs increasing in line with Peru's CPI. Stage 3 of investments will be triggered once the port reaches 300,000 TEUs annually, which we expect could occur by 2024. Stage 4 consists of infrastructure and equipment investments that could add value to the port. We expect stages 3 and 4 to be financed with internally generated funds, without incurring any additional debt. BASE-CASE KEY METRICSIn our base case, we expect a minimum DSCR of 1.36x in 2020, which is when we project the El Nino event, and an average DSCR of above 2.70x. Given that the average DSCR is significantly higher than the minimum DSCR, we apply a one-notch uplift to the project's preliminary operating phase SACP.
DOWNSIDE-CASE ASSUMPTIONSWe modeled this cycle between 2020 and 2024.
We stressed TPE's container volumes by assuming an annualized growth rate 15% below our base case for two consecutive years (2020-2021) and 7.5% below for 2022-2024. We chose to start our downside case in 2020, being the year with the minimum DSCR, because we projected the economic consequences that El Nino may cause in that year. Additionally, we increased by 10% our expectations for O&M costs. We expect tariffs to behave as established in the concession contract.
DOWNSIDE-CASE KEY METRICSWe expect the project's average DSCRs will be mostly above 1.0x. In the years that DSCRs fall below 1.0x (we expect a minimum DSCR of 0.76 under the downside scenario), the liquidity reserves (particularly the six-month debt service reserve account) and the trapped cash if forecast DSCR fell below 1.5x, would be sufficient to support the debt service payment within a three-to-four year shortfall.
MODIFIERSModifiers do not impact the project's preliminary SACP.
TRANSACTION STRUCTUREParent linkage: Delinked Structural protection: Neutral
LIQUIDITYWe consider TPE's liquidity protections to be neutral. They include a six-month debt service reserve account (DSRA) and a $2.5 million O&M reserve account.
Restricted payments (including distributions to shareholders) are allowed following a backward and forward distribution test with a minimum DSCR of 1.5x, as long as those payments are made in accordance with established clauses, including absence-of-default, fully-funded reserves, and the completion of Stage 1 investments (already certified by the independent engineer).
OUTLOOKThe stable outlook reflects our expectation that TPE will continue to maintain its operating and financial performance in the upcoming 12 months. We believe TPE will benefit from increased traffic levels given the pace of economic growth in Peru and the port's ongoing development. In 2016, we expect a DSCR of more than 2.0x. The DSCR will also benefit from TPE starting to pay the principal on its notes from 2017.
An upgrade would most likely depend on TPE further consolidating its business position. This could mean, for example, increasing its client base and revenue sources or raising its export market share in Peru. In addition, improving traffic levels, raising the minimum DSCR above 1.75x on a consistent basis, could lead us to consider an upgrade.
We could lower the rating if traffic declines at the port, for example due to effects caused by El Nino phenomenon; if the minimum DSCR falls below 1.2x; or if volumes handled decrease, adding unexpected pressure to TPE's liquidity.