OREANDA-NEWS. Fitch Ratings has affirmed THPA Finance Limited's (THPA) notes, as follows:
GBP115.5m Class A2 secured 7.127% fixed-rate notes due 2024: affirmed at 'A-'; Outlook Stable
GBP70m Class B secured 8.241% fixed-rate notes due 2028: affirmed at 'BB+'; Outlook Stable
GBP30m Class C secured 10% fixed-rate notes due 2031: affirmed at 'BB-'; Outlook Stable

The affirmations reflect THPA's good performance in FY14. The handled volumes have increased yoy by nearly 5%, supporting 5% and 7.5% growth in reported revenues and pre-exceptional EBITDA, respectively. Pre-exceptional EBITDA was further enhanced by lower overheads, as certain historic claim provisions were resolved and released in FY14. The results have been mainly driven by revenue growth in port operations (bulks +5% and unitised and port-centric logistics +10.7%). However, revenues are still around 7% below their peak in 2008. Fitch expects volumes to increase slightly in FY15 with revenues also supported by moderate tariff increases.

KEY RATING DRIVERS
Fitch's ratings are based on the following factors, among others:

Revenue Risk - Volume: Midrange
The majority of Teesport's traffic is associated with production facilities from the steel, chemical and oil industries located in the vicinity of the port. Total handled volumes in Teesport increased by nearly 5%, largely due to strong growth in Conoco Phillips (COP) volumes, the port's second-largest customer. COP' volumes rebounded strongly in FY14 (+25% yoy, vs -12% the year before). This increase is mainly the result of higher extraction rates in North Sea oil due to new fields. Furthermore, COP's FY13 results were negatively impacted by longer maintenance outages. However, COP's volumes are still 11% short of FY11 numbers.

THPA's management continues to diversify its revenue sources. Nevertheless, approximately 33% of the group's revenues are still driven by its five largest customers. The largest customer, SSI UK, continues to depend on financial support from its parent company, Sahaviriya Steel Industries (SSI), especially as steel prices have been falling materially in 2015. Fitch takes some comfort from SSI's significant financial commitment made when it acquired the plant, investments undertaken to lower production costs and derived demand for the exported slab production. Furthermore, at the end of last year SSI UK extended its contract with the port group until 2021.

Revenue Risk - Price: Midrange
The PD Ports 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 and, together with rental agreements, represent approximately 20% of revenue.

Infrastructure Development/Renewal: Midrange
The port is generally well maintained, but some larger refurbishments were carried out in 2014 (and will continue in 2015). The cumulative maintenance capital additions in FY14 amounted to GBP19.3m, which was materially higher than the covenanted minimum requirement (GBP3.75m). The major capital project has been the maintenance of the No 1 Quay deck at Tees Dock, which is scheduled for completion in May 2015. As part of the project, some expansionary capex has been invested as the berth is being deepened to 14.5m. Capex is partly funded internally (through free cash flow) as well as through external sources, with unsecured debt and shareholder loans both raised outside the ring-fenced group.

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 present. 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 the security (via the security trustee) at the expense of junior notes. The liquidity facility is available only to Class A notes. This puts Class A noteholders in a materially stronger position compared to junior ranking Class B and C noteholders resulting in a comparatively large rating differential between senior and junior ranking notes.

Financial Metrics
The transaction's reported EBITDA debt service coverage ratio (DSCR) stood at 1.54x as of end-December 2014, ahead of its 1.25x default covenant at the borrower level - slightly better than expected. Nevertheless, the transaction remains in lock-up and is expected to remain so next year as well given the sizeable maintenance capex plan that triggered the Net Cashflow DSCR (0.82x in December 2014) to be below the Restricted Payment Conditions of 1.35x.

Rising EBITDA in conjunction with further class A2 amortisation lowered debt to EBITDA to around 2.9x, 4.7x and 5.5x for Classes A2, B and C, respectively. Fitch's rating case forecasts for the medium term are largely in line with last year's, with the minimum of the average and the median projected EBITDA DSCRs at 2.2x/1.7x/1.5x for Class A2, B and C, respectively.

Peer Group
THPA's closest peer is ABP Finance PLC (ABP) which is rated 'A-', but at a materially higher net debt to EBITDAR of nearly 7.5x. 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 to THPA.

RATING SENSITIVITIES
Transaction revenues could be adversely impacted in a number of scenarios, including a material reduction in oil revenues, repeated mothballing of the Redcar steel plant or loss of a major customer. The most severe outcome would be if the Redcar steel plant is mothballed again or operating costs spiral.

Furthermore, the ratings could come under pressure if, in the face of a challenging economic environment, transaction cash flow proves less resilient than Fitch would expect and EBITDA DSCR forecasts are consistently below 2x at Class A, 1.6x at Class B and 1.4x at Class C level over the medium term.

Fitch does not expect to upgrade the ratings in the short to medium term.

TRANSACTION SUMMARY
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.