Fitch Assigns Global Ports (Finance) PLC's Notes Final 'BB+' Rating
OREANDA-NEWS. Fitch Ratings has assigned Global Ports (Finance) PLC's (GPI Finance) USD350m notes a final senior unsecured rating of 'BB+'. The Outlook is Stable. A full list of rating actions is available at the end of this rating action commentary.
KEY RATING DRIVERS
GPI Finance has issued fixed-rate notes, which are unconditionally and irrevocably guaranteed on a joint and several basis by the group parent Global Ports Investments PLC (GPI) (hold co) and its three major operating subsidiaries (opco) First Container Terminal Incorporated (FCT), Joint-Stock Company "Petrolesport" (PLP) and Vostochnaya Stevedoring Limited Liability Company (VSC), representing 99% of consolidated EBITDA. The bond proceeds were used to refinance existing indebtedness at opco levels. GPI's consolidated leverage therefore has not increased as a result of this transaction.
Bond documentation includes cross-default provision for debt raised at issuer, guarantor and subsidiary levels as well as a cap on additional debt and restrictions on distributions (both with carve-outs) when the pro-forma leverage ratio is higher than 3.5x. We believe that the change of control clause is not effective as it does not prevent APM Terminal - one of the two co-controlling shareholders - to dispose its 30.7% stake in GPI as the bondholders' put option is exercisable only if a new shareholder gains 50% or more of GPI share capital.
The 'BB+' rating of the notes reflects our 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. The rating of GPI 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 and some restrictions on intra-group loans, prevent GPI's rating from being aligned with our assessment of the consolidated profile of the group.
GPI's ratings reflect GP group's dominant position in the Russian container market as well as the group's exposure to the current domestic economic downturn. The ratings also reflect our expectation that GPI's leverage will progressively decline from current fairly high levels, due to a shareholder-supported zero dividend policy. Lack of committed liquidity lines is a weakness given the partly back-ended debt structure and the increasing bullet profile of group debt.
GPI is around 7x bigger, has a stronger market power and shareholder structure and more transparent corporate governance by being listed on the LSE than LLC Deloports (BB-/RWN). Deloports is more exposed to competition but has a more balanced export and import mix with grain exports partially offsetting the import-oriented container business. Deloport has lower leverage at 1.8x than GPI at 3.6x but its volume risk assessment is Weaker compared with Midrange for GPI.
Mersin (BBB-/Stable) has a similar size to GPI at 1.5 million TEU and, similar to GPI, plays a dominant role in its home market. Its cargo import and export mix is more balanced than GPI, which is more exposed to the Russian recessionary environment. Mersin's current lower leverage than GPI supports its higher rating.
Volume Risk -Midrange
GPI is Russia's largest container port operator handling 41% of the country's container throughput. The group dominates the Baltic Sea with a 61% share of regional throughput in 2015, which is approximately 3x larger than the second-largest port operator in the basin. GPI has also a solid footprint in the Far East where the group and its main competitor Fesco control a third of the market each.
GPI can leverage against its portfolio of 10 terminals and 37 berths, which are owned or operated under long-term leasing agreements, to offer a widespread network to shipping lines. The group has long-standing relationships with major shipping companies although contracts in place are short- term, usually one year, and without minimum guaranteed revenue. A.P. Moller - Maersk Group's twofold role as GPI's customer and indirect shareholder through the APM Terminals is, in our view, a supportive factor of GPI's revenue stability.
GPI's throughput is mostly driven by container imports, which are being severely hit by Russia's current economic downturn and reduced consumer spending. In 2015, the group saw its container volume shrink 35%, compared with a 26% fall in the overall Russian container market. This reflects GPI's preference to maintain prices over volumes as well as its large exposure to the Baltic basin, which was affected by the downturn more than Far East and Black Sea Basins.
Under Fitch's rating case container throughput will drop a further 8% in 2016 and remain flat in 2017. The downside risk mainly stems from the limited visibility on the long-term evolution of oil prices, rouble performance and, ultimately, Russian economic activity.
Price Risk - Midrange
Federal Tariff Service authority eliminated price regulation for ports located in St. Petersburg in 2010 and for Far East ports in 2012. Tariffs are market-based and have steadily increased over the past six years. Almost all of GPI's tariffs and revenues are in USD and collected directly in USD or at an equivalent amount in rouble. The rouble share of revenue is used to pay costs denominated in local currency with the remainder converted into USD.
Infrastructure Development & Renewal- Stronger
Over 2008-2013 GPI invested heavily in terminal upgrades. These investments brought group capacity to more than 4 million TEU (currently less than 50% used), a level sufficient to accommodate increasing volumes in the future. On-site connecting infrastructure is well developed and does not need upgrades.
In view of the difficult market environment and sound asset conditions, GPI plans to only carry out maintenance capex over the medium term. Maintenance capex is manageable at around USD25m per year and entirely self-funded through free cash flow (FCF) generation. The presence of APM Terminals, one of the world-largest terminal operators, as a shareholder brings operational expertise and mitigates the risk of cost overrun on capital spending.
Debt Structure- Midrange
The hold co is currently free of debt. The debt structure factor therefore reflects our assessment of consolidated debt, which comprises several loans raised at Russian opco level. These loans are structured as corporate secured debt and are fully USD-denominated post swap. GPI guarantees three of the opco loans. Foreign currency risk on debt is naturally hedged as tariffs are set in USD.
Part of group's borrowings has financial covenants tested at opco level. In some cases covenants are tested also at the consolidated level to induce moderate deleveraging over the next two years (2016E: less than 4x; 2017E: less than 3.5x).
The group has recently diversified its funding structure and reduced its exposure to floating interest rates. It refinanced some bank loans through three bond issues of RUB15bn (swapped in USD) and the current USD350m bond issue. Post refinancing, overall group debt structure is largely fixed-rate, fully USD-denominated post swap, largely covenanted with cross default and change-of-control clauses and with a balanced mix of floating and fixed interest rates and bullet and amortising maturities. Should the share of current bullet debt (56%) and/or the concentration of maturities increase in the future, we may revise our current assessment of debt structure to Weaker.
Lack of committed liquidity lines is a weakness, which the cash buffer held on balance sheet only partly mitigates. According to our liquidity analysis that factors in available cash at end-2015 and the FCF generated under the rating case, group debt maturities are covered until end-2019.
We consider the presence of APM Terminals a well-reputed sponsor with a strong but informal commitment to GPI as a supporting factor in GPI's refinancing process. We typically observe this kind of soft support in businesses where sponsors perceive long-term economic value in the asset and are therefore incentivised to provide support to smooth temporary liquidity shortfalls. A potential change in GPI's ownership may affect Fitch's assessment of the refinancing risk. We also view GPI's listing on London Stock Exchange as a positive factor as it gives GPI additional financial flexibility.
Fitch-adjusted net debt-to-EBITDA stood at 3.6x at end-2015. This high leverage relative to Russian and Turkish peers results from the partial debt-funded acquisition of the second-largest Russian container operator in 2013. Deleveraging is a key priority of both GPI management and its controlling shareholders, who are committed to a zero dividend policy until group leverage reaches 2x.
Fitch's rating case uses more conservative assumptions than management on volumes, operating and capital spending, interest rates and dividends received from joint ventures. As a result, we expect leverage to fall below 3x over a three-year horizon and further beyond. The rating case does not factor in any shareholder distributions, in line with GPI's stated zero dividend policy.
When running our sensitivity stresses on a variety of factors, notably flat tariff over the next three years and a hypothetical 30% rouble appreciation, we found that, all else being equal, the impact is confined to only a delay to the expected group deleveraging process. This said, the sensitivities also show that a harsher-than-expected drop of container volumes in 2016 of minus 20%, against minus 8% in the Fitch rating case, would have a substantial negative impact on projected leverage metrics.
The rating of the notes is credit-linked to the Long-term IDR of GPI; future development that could lead to negative rating actions on both GPI and the GPI Finance notes include:
- Dividend distributions impacting GPI's expected deleveraging profile
- Fitch-adjusted GPI's consolidated debt/EBITDA remaining above 3.0x over a three-year horizon to 2018 in Fitch rating case
- Adverse policy decisions or geopolitical events affecting the port sector
- Failure to maintain adequate liquidity to cover GPI's debt service maturities
- Failure to comply with covenants at opcos and consolidated levels
- An increase in bullet debt and/or concentration in maturities or a potential 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.
Rating upside potential is currently limited. We do not expect improvement in the Russian economy in the near term, as indicated by the Negative Outlook on Russia's sovereign rating.
FULL LIST OF RATING ACTIONS
Global Ports (Finance) PLC
USD350m senior unsecured notes due January 2022: assigned at 'BB+'; Outlook Stable
Global Ports Investments PLC
Long-term Foreign and Local Currency IDR: affirmed at 'BB'; Outlook Stable
JSC First Container Terminal
RUB5bn senior unsecured notes due December 2020: affirmed at 'BB'; Outlook Stable
RUB5bn senior unsecured notes due February 2021: affirmed at 'BB'; Outlook Stable
RUB5bn senior unsecured notes due March 2021: affirmed at 'BB'; Outlook Stable