OREANDA-NEWS. Fitch Ratings has downgraded THPA Finance Limited's (THPA) notes as follows:

GBP110.7m class A2 secured 7.127% fixed-rate notes due 2024: downgraded to 'BBB' from 'A-'; off Rating Watch Negative (RWN); Outlook Negative
GBP70m class B secured 8.241% fixed-rate notes due 2028: downgraded to 'BB-' from 'BB+'; off RWN; Outlook Negative
GBP30m class C secured 10% fixed-rate notes due 2031: downgraded to 'B' from 'BB-'; off RWN; Outlook Stable

The rating actions follow THPA's announcement regarding the impact of the permanent closure of Redcar steel plant and the related liquidation of Sahaviriya Steel Industries (SSI). SSI's contribution to EBITDA in the year to June 2015 was assessed by the company at around GBP10m (approximatively 25% of yearly EBITDA). The downgrades reflect the lower future cash flows and the consequential reduction of debt service coverage ratio (DSCR) metrics. The Negative Outlook on the class A2 and B notes reflects the uncertainty over the exact impact on revenues and operating costs, and potential revision of the capital expenditures funding programme. The Stable Outlook on the class C notes reflects the very limited potential for further downgrades, given the deferability of payments due on this tranche and therefore the low likelihood of default in the next few years.

KEY RATING DRIVERS
Revenue Risk - Volume: Midrange
After the SSI liquidation and Redcar steel plant closure, the majority of Teesport's traffic depends on the chemical and the oil industries located nearby the port, with a heightened concentration risk in terms of businesses and customers. The largest customer is now Conoco Phillips, who led the increase in the total handled volumes in FY14 despite the challenges the crude oil business is facing. SSI was the largest customer with a 15% contribution to revenues, beyond being the driver for future EBITDA growth. THPA's management will continue to focus on diversification strategies to recover the volume loss.

Revenue Risk - Price: Midrange
The group employs a combination of a 'landlord' and 'operating' business model, thus maintaining some volatility related to operating risk from its business. Tariffs are unregulated and, to a varying extent, linked to inflation. Contracts with guaranteed revenue are mostly short term. Fitch expects the portion of guaranteed revenues to decrease after taking out SSI's contribution to 10% of revenues (from 20%).

Infrastructure Development/Renewal: Midrange
The port is generally well maintained and notably some larger refurbishments were made in 2014 and 2015 in relation to the No. 1 Quay deck maintenance. The company was expecting the funds available for investment to increase as a result of the conditions agreed with the SSI contract renewal in 2015, in addition to external sources. The availability of internal and external funds for ongoing investment will now partly depend on the business's ability to attract new volumes over the next few years.

Debt structure: Stronger for Class A notes and a Midrange for Class B and C notes
All classes of notes are fully amortising and benefit from a strong security package typical for UK whole business securitisations. There is no interest rate risk. The transaction allows for more control by the senior noteholders if performance deteriorates and covenants are breached as a borrower event of default could lead class A noteholders to enforce at the expense of junior notes. The liquidity facility is available only to the class A notes.

Financial Metrics
The projected minimum of average or median EBITDA DSCR in Fitch's rating case has deteriorated to 1.6x (from 2.2x), 1.2x (from 1.7x) and 1.1x (from 1.5x) for the class A2, B and C notes, respectively. Under Fitch's rating case the transaction is projected to breach the default covenant at the borrower level (set at 1.25x) over the medium term and will remain in lock up. Falling EBITDA worsened gross debt to EBITDA to around 3.8x (from 2.9x), 6.3x (from 4.7x) and 7.3x (from 5.5x), respectively, for each class of notes.

Peer Group
The closest peer used to be ABP Finance PLC (ABP) which is rated 'A-', but THPA suffers from a weakened revenue profile and coverage metrics. Fitch assesses ABP to have Stronger Revenue Risk characteristics (both in terms of Volume and Price) due to ABP's dominant market position in the UK and its diverse revenue streams. Additionally, almost 50% of revenues are either contractually fixed or subject to minimum guarantees. Consequently, we consider ABP to be stronger in terms of cash flow volatility compared with THPA.

RATING SENSITIVITIES
The rating could be downgraded if the impact of SSI's liquidation proves to be higher than expected. In addition, a reduction in oil revenues or the loss of another major customer could adversely impact the transaction's revenues. EBITDA DSCR forecasts under Fitch's rating case consistently below 1.50x at class A and 1.20x at class B will trigger further negative rating actions. Notably, we view the class C notes as less likely to be downgraded due to their deferability, resulting in a low likelihood of default in the next few years.

The Outlook on the class A2 and B notes may be revised to Stable if, absent other negative developments, the EBITDA proves to be consistently in line with the updated forecasts.

SUMMARY OF CREDIT
THPA is a securitisation of the assets held, and earnings generated, by the PD Ports group, which owns the port of Tees & Hartlepool on the northeast coast of England.