OREANDA-NEWS. Fitch Ratings has affirmed Mersin Uluslararasi Liman Isletmeciligi A.S.'s (Mersin or MIP) USD450m senior unsecured debt rating at 'BBB-' with a Stable Outlook.

The 'BBB-' rating is supported by MIP's strong revenue and EBITDA performance in 2014 (albeit with some slowdown in 1Q15), as well as its established market position and moderate leverage. The rating is constrained by its weak unsecured debt structure, exposure to refinancing risk and Turkey's sovereign rating (BBB-/Stable). The exposure to bullet refinancing risk is partially mitigated by the expected cash build up prior to debt maturity in Fitch's rating case (FRC).

MIP achieved 9% growth in container throughput in 2014, 17% growth in conventional throughput and 10% growth in EBITDA, with gross debt/EBITDA at 2.7x and net debt/EBITDA at 1.9x. However, there was a slowdown in revenue and EBITDA in 1Q15, which Fitch expects to impact 2015 full year numbers. Fitch expects Mersin to continue to de-lever from 2016-2020 in its rating case (2020 debt/EBITDA 2.3x in the FRC). With 20-year synthetic amortisation, the FRC suggests that Mersin's concession would have the economic capacity to refinance/repay its debt with minimum annuity DSCR at 1.4x and average annuity DSCR at 2.1x.

KEY RATING DRIVERS
Volume risk - Midrange
The port benefits from a strong and well-connected hinterland. It has demonstrated stable demand from the local market over the past five years, with limited competition thus far from the nearby Iskenderun Port. MIP remains the largest export-import port in Turkey, as well as the second-largest in terms of containerised throughput (1.49 TEUm, 2014). The goods mix handled at the port is diversified and balanced between imports and export flows. These characteristics made container throughput resilient during the most recent downturn of 2008 where turnover peak-to-trough was only down 1.8% y-o-y in the context of an annual 5% drop in Turkish GDP over the same period. Ultimately, MIP's single asset nature and its location in a dynamic albeit unstable economy suggest a Midrange assessment.

Price risk - Midrange
MIP's concession gives it full flexibility with respect to its pricing policy. The concession prescribes only against 'excessive and discriminatory pricing', for which there is no history of enforcement. However, the typical contract length with MIP's customers at the port is rather short (two years on average) and includes volume-related incentives among others. Although this optimises the upside potential, it also exposes MIP to downside risk, since flexibility can become a weakness if volumes drop. The depreciation of the local currency during 2014 is seen as the cause for tariff moderation, as it mechanically increases the cost of USD-denominated tariffs for the customers that service it with local currency. Very modest increases in USD-denominated tariffs are in line with FRC assumptions.

Infrastructure Development and Renewal - Midrange
There is no longer a regulatory requirement to increase capacity at the port (currently at 1.8m TEUs, expected to increase to 2.6m TEUs by 2017 and possibly further thereafter, if justified by volume growth). MIP is engaged in an effort to significantly upgrade and expand its container capacity with a new berth that will allow it to accommodate the next generation of larger vessels, an increasingly evident trend in the current shipping market. This is expected to become operational in 2016. Fitch does not include material additional volume growth from this investment in the rating case.

Debt Structure- Weaker
This attribute is constrained by refinance risk, with bullet maturity of the bond in 2020, at the same time as the bank loan maturity. Given that the track record of Turkish issuers in the capital markets is only limited, this places higher reliance on the local bank market, which is still fairly concentrated but has demonstrated adequate liquidity recently. It is also constrained by the lack of any material covenant protection apart from restrictions imposed upon debt levels (net debt/EBITDA above 3.5x would constitute a default, stepping down to 3.0x from 2017 until maturity). The senior debt is unsecured and does not benefit from a security package. In addition, the financing documentation contains few restrictions on the issuer developing other business interests outside the operation of Mersin port.

Fitch has therefore carried out a synthetic amortisation calculation in its rating case which suggests that there is sufficient value in the concession to fully repay outstanding debt. Minimum annuity DSCR is 1.4x in the rating case and the average is 2.1x. Fitch also highlights the presence of a sponsor group with local and international banking relationships and considers that the sponsors are likely to support the company if refinancing is hampered by temporary disruption to the capital markets.

RATING SENSITIVITIES
The ratings are unlikely to be upgraded in the medium term due to the sovereign rating of Turkey (reflecting economic and political uncertainty), refinancing risk and midrange volume and price risk factor assessments.

The ratings could be downgraded if annuity DSCR falls below the Fitch rating case (minimum 1.4x and average 2.1x) or if deleveraging does not take place in line with the Fitch rating case (gross debt/EBITDA greater than 2.6x from 2016-2020), due to lower revenue growth, or higher than expected cash leakage.

SUMMARY OF CREDIT
Situated in the Cukurova region on the Eastern Mediterranean coast, MIP is Turkey's largest port in terms of import/export container throughput and the second-largest container port by total throughput. The port has a deep water harbour comprising of 21 berths and is well equipped to handle a range of dry bulk, liquid bulk, containers and roll on-roll off cargos. MIP also benefits from a sizeable hinterland and solid in-land connections (both road and rail), historically enjoying a near-monopoly position of the regional container market.