OREANDA-NEWS. Fitch Ratings has affirmed the rating of Terminales Portuarios Euroandinos Paita's (TPE) USD110 million senior secured notes at 'BB-'. The Rating Outlook remains Stable.

The rating affirmation reflects volume growth in line with Fitch's base case projections, strong revenue growth, and moderate increases in expenses. The 'BB-' rating reflects an asset with weaker volume and price risk assessments, as a result of high concentration of cargo types, business lines, and customers, as well as the limited flexibility to manage toll increases. The rating also considers the ports's obligation to make capital investments once certain thresholds are met, which would lead to pressured financial ratios, moderately high leverage, and dependence on cash reserves. In Fitch's rating case, the ports's Debt/CFADS ratio at 9.76x is commensurate with its rating, and while the average debt service coverage ratio (DSCR) of 1.70x could indicate a higher rating, required investments result in DSCR coverages below 1.0x in at least five years, creating dependence on cash reserves in order to meet debt service obligations. The port depends on some growth in container volume (2.1% every year) and is highly exposed to increases in operating expenses. The Port of Paita is comparable to the Commonwealth Ports Authority (the authority), with similar revenue risk attributes and both rated 'BB-' by Fitch.

The concessionaire is currently awaiting completion acceptance for Phase II investments from the authority, and is also in the process of requesting an extension of the completion date in order to finish some projects. Fitch will closely monitor the outcome of both events, and may hold an event-driven committee if there are any negative impacts to the rating, as detailed below in the Rating Sensitivities.

KEY RATING DRIVERS

Exposure to Cargo Volume (Revenue Risk - Volume: Weaker): The Port of Paita is a secondary port of call with considerable concentration in cargo types, business lines, and customers. Profitability has been improving given the operator's strategic emphasis on special services. The port is exposed to cargo volatility, as contractual agreements with shipping lines are limited, and weak overland transportation infrastructure limits the service area mostly to commodity exports. The region is exposed to the material volatility of fishing-related exports due to the area's exposure to climatic effects related to El Nino.

Limited Pricing Flexibility (Revenue Risk - Price: Weaker): Port tariffs and fees were initially established in the concession agreement, and are subject to regulatory modifications every five years, beginning in 2019, reflecting limited flexibility to adjust for increasing costs. A Minimum Revenue Guarantee (MRG) was granted by the Government of Peru; however, the amount of the guarantee and the complex, extensive process of executing the guarantee does not adequately protect the project from its obligations.

Defined Capital Program (Infrastructure Development & Renewal: Midrange): The concession agreement established a well-defined capital improvement, planning, and funding process, composed of four phases, and including mandatory and optional investments. Phase I included the majority of investments and was finalized in 2014. Subsequent phases are triggered by defined volume levels, and are funded by special, separate reserves.

Adequate Structural Protections (Debt Structure: Midrange): The project's financial flexibility is sustained by adequate liquidity reserves, available for debt service payments and construction costs. The structure incorporates a strong distribution test in order to trap cash to prefund future investment costs. A five-year principal repayment grace period provides flexibility in the initial years; however, the amortization schedule results in significant back-loading, since half of the debt is expected to be repaid in the last six years of the debt's 25-year term.

High Leverage: Fitch's rating case Debt/CFADS stands at 9.76x, reflecting dependence on volume growth to maintain healthy financial ratios. The concession agreement allows for an adequate cash flow generation term. However, required investments for stages II, III, and IV (additional investments), significantly reduces the project's financial flexibility and its dependence on reserves, with natural minimum DSCR (without cash) below 1.0x.

Peers: The Port of Paita (Paita) is most comparable to the Commonwealth Ports Authority (CPA), both rated 'BB-'/Stable Outlook. Both ports have weaker volume and price risk attributes, and are classified as small ports. Paita is considered an Operator Port, while CPA operates under a 'Landlord' scheme, although Fitch's criteria does not directly favor one type over the other. Under Fitch's rating cases both transactions have the same coverage level, with an average DSCR of 1.70x; however, the former has considerably lower leverage (2.12x vs. 9.76x).

RATING SENSITIVITIES

Negative: Failure to receive completion acceptance on the Phase II investments, and/or failure to receive an extension in order to perform remaining works, could allow the concession agreement to be terminated, and result in a negative rating action.

Negative: Regardless of the reason that may cause it, a decrease in cash available could pressure debt service obligations and/or mandatory investments.

Positive: Sustained revenue over-performance with controlled expenses that results in less dependence on cash reserves in order to meet obligations could lead to an upgrade.

SUMMARY OF CREDIT

The Port of Paita is located in the region of Piura, a small city with low economic activity, 1,030km northwest of Lima. Paita is connected to a major highway that links it to the Yurimaguas port (Amazon system) with no significant competition. The location provides a competitive advantage over Callao and Guayaquil, for serving the northwestern Peruvian market.

CREDIT UPDATE

After completing construction work in line with the initial schedule in June 2014, the project entered into full operations following acceptance from the grantor on September 30. In 2015, the port operated 210,631 20-foot equivalent units (TEUs), an increase of 9.1% over the prior year and higher than the 203,884 TEUs expected by Fitch's base case.

Revenues were considerably higher than expected, with USD34.9 million generated in 2015, against our expectation of USD24.6 million in both our base and rating Cases. Containers and Bulk Solid revenues were almost 22.6% higher and Special Services 85% higher than originally expected.

Strong revenue increases and controlled operating expenses resulted in Fitch calculated CFADS of USD18.6 million, 53.7% above our projected rating case CFADS of USD12.1 million for the same year. Debt amortization is expected to begin in 2017, following a five-year grace period, per the amortization schedule.

As stated in the concession agreement, Phase II was triggered after 180,000 TEUs were surpassed in 2014. The limit for the completion of Phase II works was July 7, 2016, and most of the required items were completed; Autoridad Portuaria Nacional's (APN) completion approval was requested and is still pending. However, the removal of a sunken ship, also part of Phase II, has proven to be more complex than expected. The concessionaire requested an extension from the Ministerio de Transportes y Comunicaciones (MTC) on the limit date for this reason; their response is still pending. Regardless of a possible extension, certain delay penalties may be applied by the grantor. Any penalties incurred for this reason will be passed on to the provider, as stated in their contract with Terminales Portuarios Euroandinos (TPE).

Base and Rating Case Descriptions

Fitch's base and rating case scenarios consider increased operations and maintenance costs, two El Nino events that reduced volumes, and a 2% reduction in tariffs in 2019 and a further 1% each of the following five years to account for the regulatory effect of improved productivity. The container volume CAGRs over the life of the debt are 3.9% and 3.4% for the base and rating cases, respectively.

As a result of the large mandatory capital expenditures that are triggered according to container volumes attained over the life of the transactions, the DSCR, not considering reserves funded to address this risk, is below 1.0x in some periods under both The base and rating case scenarios. The base case minimum and average DSCR are 0.71x and 2.49x, respectively, while the rating case minimum and average DSCR are 0.19x and 1.70x. Minimum DSCR for the base and rating case scenarios considering reserves are 2.53x and 1.62x.