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

The midrange volume risk and the weaker debt profile are the higher-influence key rating drivers for MIP. Although it benefits from its advantageous location and strong connectivity to its hinterland, we consider its domestic and export markets volatile. MIP is exposed to refinancing risk as its unsecured bond, bank loan and liquidity facility mature in 2020. We believe these attributes constrain the rating despite the strong metrics. We forecast under our rating case gross debt/EBITDA below 2.7x in the next five years and some cash build-up to mitigate refinancing risk.

KEY RATING DRIVERS

Volume Risk - Midrange

MIP's single-asset nature and its location in a dynamic, albeit volatile economy suggest a "Midrange" assessment. Its exposure to Russia, China and to some extent neighbouring Syria affected 2015 revenues. Revenues in 2015 decreased by 4.1% in 2015, due to 2% decline in container volumes and 12% decline in conventional cargo. At the same time, Turkish GDP grew by 4%.

Positively, MIP benefits from its advantageous location and strong connectivity to the hinterland. Fitch assesses it as secondary port of call under its criteria, although it remains the largest export-import port in Turkey, and the second largest by containerised throughput, with limited competition from the nearby Iskenderun Port to date.

Price Risk - Midrange

MIP's concession gives almost full pricing flexibility. The concession prescribes only against "excessive and discriminatory pricing", on which there is no history of enforcement. However, the typical contract length with MIP's customers is rather short (two years on average) and includes volume-related incentives. This optimises the upside potential, but also exposes MIP to downside risk, as flexibility can become a weakness if volumes drop.

The depreciation of the local currency prevents large tariff rises, as it mechanically increases the cost of US dollar-denominated tariffs for the customers that service it with local currency. The Fitch rating case assumes very modest increases in US dollar-denominated tariffs.

Infrastructure Development and Renewal - Midrange

There is no longer a regulatory requirement to increase capacity at the port, which is 2.2 million TEU after the completion of the first phase of the container capacity expansion in 2016. MIP expects this to increase to 2.6 million TEU by 2018 and possibly further thereafter, depending on volume growth.

The port is expanding its container capacity with a new berth that will allow it to accommodate the next generation of larger vessels, in line with trends in the shipping market. Fitch has not included material additional volume growth from this investment in the rating case.

Debt Structure - Weaker

Refinancing risk constrains the debt structure assessment to "Weaker". The bullet bond matures in 2020, at the same time as the USD25m bank loan maturity and the undrawn USD50m liquidity facility. The limited track record of Turkish issuers in the capital markets results in higher reliance on the local bank market, which is concentrated but has demonstrated adequate liquidity recently.

This attribute is also constrained by the lack of any material covenant protection apart from restrictions on debt levels whereby net debt/EBITDA above 3.5x would constitute a default. This steps down to 3.0x from 2017 until maturity. The senior debt is unsecured and does not benefit from a security package.

Volume growth and therefore EBITDA supports the deleveraging profile. We project gross debt/EBITDA to decline to 2.5x in 2020 under our rating case. We also calculated a synthetic amortisation calculation, suggesting there is sufficient value in the concession to fully repay outstanding debt with a minimum annuity DSCR of 1.9x and average of 2.6x in the rating case.

The presence of a sponsor group with local and international banking relationships is credit positive. Fitch considers that the sponsors are likely to support the company if refinancing is hampered by temporary disruption to the capital markets.

PEER COMPARISON

We compare MIP, as a secondary port of call, with THPA Finance Limited (THPA; Class A: BBB/Negative), Global Liman Isletmeleri A. S. (GPH; senior unsecured: BB-/Stable) and Global Ports Finance PLC (GPI; senior unsecured: BB+/Stable).

THPA has slightly higher gross debt/EBITDA for its most senior tranche, but benefits from a stronger legal and debt structure.

GPH's lower rating reflects its structural exposure to volatile business segments, which constrain the volume risk assessment to "Weaker".

GPI has a similar size to MIP at 1.5 million TEU and, like MIP, plays a dominant role in its home market. Its less balanced cargo import and export mix and higher leverage result in the lower rating.

RATING SENSITIVITIES

A positive rating action could be triggered by performance consistently better than Fitch's base case including gross debt/EBITDA less than 2x by 2020, before debt maturity. Turkey's 'BBB' Country Ceiling would continue to cap the rating.

The ratings could be downgraded if deleveraging does not take place in line with Fitch's rating case of gross debt/EBITDA greater than 3.0x from 2016-2020, due to lower revenue growth.

Higher cash leakage than Fitch expects before 2020 could also trigger a negative rating action.

A downgrade of Turkey's local currency sovereign rating below 'BBB-' could trigger a negative rating action for MIP.

SUMMARY OF CREDIT

MIP, located in the Cukurova region on Turkey's eastern Mediterranean coast, is Turkey's largest port by import/export container throughput and second-largest container port by total throughput. It has a deep water harbour with 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 large hinterland and solid inland connections through road and rail, and has historically held a dominant position in the regional container market.