Fitch Assigns DeloPorts Limited 'BB-' IDR; Outlook Stable
KEY RATING DRIVERS
Fitch considers the consolidated profile of DeloPorts to be commensurate with a 'BB' rating. This is supported by relatively low leverage (debt/EBITDA of 1.21x at YE 2014) in a business that is exposed to market risks, has significant reliance on one commodity (exports of grain) and is expected to be under stress in the next few years. DeloPorts' rating is notched down from the consolidated profile by one notch in accordance with Fitch's 'Parent and Subsidiary Rating Linkage' criteria (part of its Corporate Rating Methodology) as we do not regard the legal ties between DeloPorts and its subsidiaries as sufficiently strong to equalise the ratings. In particular, there are currently neither upstream guarantees nor cross-default provisions between the parent and subsidiaries and, additionally, some ring-fencing mechanisms at KSK level.
Volume risk - Weaker
DeloPorts' concentrated exposure to one commodity, short-term contracting strategy and competitive environment underpin the weaker assessment. DeloPorts' two main business segments (the container segment and the grain segment) are characterised by different volume drivers, which balance each other out to some extent. The container segment is mostly import-oriented and throughput is diversified, while the grain segment is fully export-oriented and relies on one commodity type.
Container throughput is mainly driven by consumption of imported goods (primarily general consumer goods and food items). The majority of container imports are shipped from Asia and the Middle East (via hub ports like Istanbul, Piraeus and Constanta) and are ultimately delivered to Moscow and Central Russia. Economic growth and purchasing power are expected to be under stress in the next few years as a result of economic recession and the substantially reduced purchasing power of Russian consumers. Lower imports may be partially offset by increasing exports of Russian containerised goods as they have become more competitive due to the weakening of the rouble. Fitch assumes a decline in container throughput in 2015 (-11% in Fitch's current base case, -16% in Fitch's rating case) in excess of GDP contraction currently expected by Fitch (-4%). NUTEP operates on the basis of short-term agreements with the shipping lines, with Maersk currently accounting for about 40% of throughput.
The majority of Russian grain is harvested in the south of Russia. Production of grain depends on weather conditions and exports are subject to Russia's policy decisions. Fitch considers these drivers to be less predictable and more volatile compared to the diversified cargo trade in the container segment. However, we view positively Russia's stable grain consumption and solid domestic reserve levels. Furthermore, exports of grain are currently beneficial to Russian producers compared with domestic sales following severe rouble devaluation in 2014.
KSK operates on the basis of short-term agreements with Russian and international grain producers and traders. Over 40% of grain transshipments are currently handled by Cargill - a large US agribusiness company that became a 25%+1 shareholder in the grain terminal in 2013. Grain export destinations are diversified, with no single market representing more than 15%. In our projections, we assume Russia's grain production is constant at 86 million tonnes (the historical average over the past 10 years) adjusted by an assumed constant share of exports (20%) and assumed market share of KSK (13% increasing to 15%). Fitch's rating case conservatively assumes grain volumes that are 20% lower than in the base case.
Volume risk assessment is further weakened by a dynamic competitive environment in both container and grain segments. OJSC Novorossiysk Commercial Sea Port (NCSP) operates similar competing container and grain terminals in the port of Novorossiysk. In the container segment, DeloPorts also competes indirectly with other container terminals in the Baltic Sea region as well as in the Far East. In the grain segment, DeloPorts competes with other deep water ports on the Black-Azov Sea.
DeloPorts has not been affected by the economic sanctions against Russia or extended by Russia so far. The ban on food imports from the EU, US and other developed countries did not affect DeloPorts due to its location and low containerisation levels of banned cargoes.
Price risk - Midrange
In 2013 price regulation was eliminated in most Russian ports, giving DeloPorts the ability to manage tariffs independently. However, NUTEP has not been formally excluded from the register of natural monopolies in transport. Tariffs have been stable post de-regulation. All tariffs are currently set in US dollars. A stronger assessment for Price risk was precluded due to the limited history of tariff and revenue stability and lack of minimum price guarantees.
Infrastructure Development and Renewal - Stronger
DeloPorts' assets are greenfield and the current capacities of both container terminal and grain terminal are sufficient to accommodate increased volumes. No significant maintenance capex is expected over the medium term. Expansion initiative is continuing, but the planned investments are discretionary and can be postponed.
Debt Structure - Midrange
The holding company currently has no debt. The risk factor assessment reflects the consolidated debt of the group. Existing debt consists of secured bank loan facilities raised by NUTEP and KSK. The two main facilities are amortising, maturing in 2016 (KSK) and 2018 (NUTEP) with a small balloon payment of USD25m. The subsidiaries should be in a position to repay the debt from operating cash flows, so there is no refinancing risk. There is full exposure to floating interest rate (US dollar LIBOR). Terms and conditions differ somewhat across the two loans. Debt/EBITDA covenant is 4.5x for NUTEP and 5x for KSK. In addition, the NUTEP loan maturing in 2018 imposes a covenant on consolidated DeloPorts group level at 4x debt/EBITDA.
Foreign currency risk on the debt is mitigated through natural hedge as all tariffs are set in US dollars while the majority of operating costs are in roubles. However, there is a short-term currency conversion risk as the revenues are collected in roubles (based on current exchange rates) and then converted to US dollars within a short time frame. In 2014 DeloPorts benefited from rouble devaluation.
DeloPorts demonstrated strong growth, healthy profitability and significant de-leveraging in the past few years. 2014 EBITDA is USD99m with EBITDA margin of 51% and total debt/EBITDA is 1.21x at YE 2014 based on preliminary management estimates. Leverage is projected to stay fairly low (maximum debt/EBITDA at 1.45x in 2018) under Fitch's rating case even with potential additional debt for the expansion programme.
The results of Fitch's sensitivity analysis show robustness of the consolidated credit profile to volume shocks. In particular, the combined downside scenario assumes container and grain volumes 30% lower than in Fitch's base case, resulting in total debt/EBITDA peaking at 1.8x in 2018. Debt metrics remain in line with implied consolidated 'BB' rating in case of a container shock scenario (50% lower than in base case) or grain shock scenario (50% lower than in base case). Our sensitivity analysis also tested for a hypothetical appreciation of the rouble close to pre-crisis levels (RUB/USD at 38) as this would have a negative impact on DeloPorts, all else being equal. The results indicate high sensitivity, but within the boundaries of the rating.
Turkish ports Global Liman Isletmeleri A.S. (GPH, BB-/Stable) and Mersin (BBB-/Stable) are close peers that also operate in an emerging market. Mersin is a bigger port that has more diversified revenue streams and a Midrange assessment for Volume risk. Fitch considered GPH a closer peer as it also has a Weaker volume risk assessment. DeloPorts' credit profile is stronger than Far Eastern Shipping Company's (FESCO, B/RWN). FESCO's port operations in the port of Vladivostok in Russia represent about half of the overall business. FESCO is more leveraged and we recently placed its rating on Rating Watch Negative due to continuing underperformance (particularly in the rail division) and the negative impact of rouble devaluation on the credit metrics as foreign currency risk is not fully mitigated.
New debt issued by DeloPorts that would be subordinated to the existing debt of the subsidiaries and/or would result in weaker debt structure assessment could be negative for the rating. Likewise, consolidated debt/EBITDA of DeloPorts group close to or exceeding 2.5x would result in negative rating action. Adverse policy decisions on grain exports or economic environment in Russia deteriorating significantly beyond Fitch's current expectations would also be negative for the rating.
Rating upside potential is currently limited. As the Outlook on Russia's sovereign rating is Negative, we currently do not anticipate improvements in the economic environment. We also currently do not anticipate changes in the corporate structure that would suggest a rating approach that would justify equalising the rating of the consolidated profile with that of DeloPorts.