OREANDA-NEWS. Fitch Ratings has upgraded Namibian Ports Authority's (NamPort) National Long-Term rating to 'AA-(zaf)' from 'A+(zaf)' and National Short-Term rating to 'F1+(zaf)' from 'F1(zaf)'. The Outlook is Stable.

The upgrade and alignment of the rating with Namibian sovereign (local currency Issuer Default Rating BBB/Stable; National Long-term rating AA-(zaf)/Stable) reflects the strengthening of the links between NamPort and its sole shareholder. This is demonstrated by the increasing amount of government guarantees for NamPort's debt and direct equity contributions and despite increasing debt leading to worsening expected credit metrics.

Under Fitch's parent and subsidiary rating linkage methodology, NamPort has strong legal, operational and strategic links with the state of Namibia, including direct government guarantees for the Africa Development Bank loan (AfDB). In Fitch's view, the ties between NamPort and its sole shareholder are likely to remain strong in the foreseeable future.

NamPort remains a strategic asset for the Namibian economy, operating the country's two ports at Walvis Bay and Luderitz, especially considering the ongoing port expansion project of NAD3.9bn (USD0.31bn), which is on schedule to be completed in 1Q17.

KEY RATING DRIVERS
Strong Government Support
NamPort's ratings are aligned with Namibia's sovereign ratings, reflecting Fitch's view on the company's links with the government, including implicit and explicit support that remains strong, given NamPort's strategic importance to the Namibian economy. NamPorts has received a state guarantee for a loan facility from the European Investment Bank (AAA/Stable) in 2002. The Namibian government has unconditionally guaranteed the payment obligations of NamPort under the African Development Bank (AfDB, AAA/Stable) loan agreement for NAD2,982m (USD240m), which is the debt-funded portion of its Walvis Bay port expansion. At FYE14, 35% (2013; 4%) of total debt was guaranteed. We expect this share to increase to around 80% by FYE15.

The Namibian government has also taken over the expansion of the oil tanker jetty project, which is no longer included in the capex for NamPorts (2013: NAD600m). On completion of the project these assets will be transferred for management to NamPort (without any liabilities). The equity contribution of NAD725m (USD58m) and the transfer of the oil tanker jetty project further reflect the strength of the links between NamPorts and the Namibian government.

Port Expansion Project
The expansion project will include the construction of a new container terminal incorporating an additional 40 hectares of land with a quay length of 600m. The new container terminal will accommodate a capacity of 750,000 twenty-foot equivalent units (TEUs) per year, complementing the existing 350,000 TEUs per year. Upon completion, which is expected by 2017, the new container terminal will realise a deep water depth of 16m. In Fitch's view, the scale of the port expansion is ambitious, with minimal 'phasing-in' to limit the downside risks in a scenario of weaker traffic volumes. Fitch expects the project to be 76% debt-funded and that NamPort's financial flexibility will weaken during the construction period and early commission phase expected in 2017.

We expect NamPort to be able to generate sufficient cash flow to service the expansion-related debt. However, the size of the port expansion is beyond NamPort's unsupported balance sheet capacity, which means the government has to provide a significant support by guaranteeing the AfDB loan and providing new equity to NamPort. NamPort will fund 24%, estimated at NAD941m (USD76m) of the project cost, with a combination of investments (NAD722m) and a government contribution/grant (NAD725m). As of May 2015, NAD200m of the government grant had been received with the remaining NAD475m expected before financial year end 2017 (FYE17). The government's mandate is to ensure that NamPort has adequate funding to become a logistics hub for Namibia and southern Africa.

Higher Capex to Increase Leverage
The investment growth will place strain on NamPort's standalone credit metrics and Fitch forecast funds from operations (FFO) adjusted net leverage to increase to around 5.8x by FY16 from 1.7x in FY14 as NamPort draws down on the AfDB loan. In our view, the ratings remain supported by the links to the parent, despite the weaker metrics. Debt service is helped by an initial grace period, but ensuring sufficient cash flows for service will be key for NamPort.

Operational Performance
We view positively NamPort's active approach to shippers with some long-term agreements improving operational visibility. The port expansion is important to ensure capacity does not constrain regional growth and development and for meeting the infrastructure goals set by the state in its Vision 2030 policy. NamPorts was operating close to capacity in 2012 at 337,134 TEU, which reduced to 255,246 TEU in 2014 (a year-on-year decline of 36%). Labour unrest in North Africa was the main cause of the reduction. Namibia has had GDP growth of 5.2% average per year for the past five years. The GDP growth contributed to an increase in origin and destination cargo (O & D) which helped offset the decrease in transhipment cargo. The captive market is limited by Namibia's population of 2.3 million. Export cargo has been helped by uranium exports, which are not linked to global commodity price and volume decline.

Future Demand
Fitch believes declines in the transhipment volumes could recover in future as the local economies of Angola, Bostwana, DRC, Malawi, Zambia and Zimbabwe improve. In addition, Namibia and Botswana government have signed a memorandum of understanding which could see Botswana's coal being exported from NamPorts (five-year horizon before final decision). Fitch views the port expansions is beyond NamPort's current and medium-term market demand, but understand that NamPort is investing for future demand in the long term. NamPorts aims to grow the Port of Walvis Bay as a transhipment hub for trade with southern and central Africa.

Fitch expects stable demand from O & D cargo, given the major infrastructure projects planned for the region (Kudu-Gas-to-Power Plant, Husab Mine, St Helena Airport). Project cargo imported by China Harbour Engineering Co Ltd (CHEC) for the new terminal helped limit the cargo volume decrease.

Regional Competitiveness
The competitive environment on the West Coast represents a risk, as shipping lines have significant flexibility to redirect cargo on an on-going basis to Angola or South Africa. However, NamPort benefits from the region's growth (traffic to/from land-locked countries of Botswana, Zambia and Zimbabwe) as a distribution centre, which enhances the authority's facilities importance and reduces market risk.

LIQUIDITY & DEBT STRUCTURE
Satisfactory Liquidity
As of August 2014, NamPort had NAD597m of cash compared with short-term debt of NAD301m. Fitch expects the company to generate negative free cash flow (FCF) over 2015-2017 due to the intensive capex programme. The negative FCF will be funded by the drawdown of the NAD2,532m committed AfDB loan, NAD525m of government grants and release of NAD300m of the total NAD722m long-term investments at financial year-end 2014.

CHEC and NamPorts have agreed on FX risk sharing. The first 5% appreciation or depreciation will be absorbed by CHEC. Anything outside of this level will be shared 50/50. NamPorts has hedged its forex exposure, which has helped limit the negative impact of NAD devaluation against the USD.

The AfDB loan has a five year grace period and repayment is over 15 years in 30 consecutive semi-annually instalments. However the amortisation of the loan is non-linear in the first two years, following the expiry of the grace period. This should enable NamPort's capacity to ramp up volumes and generate enough cash resources to allow for higher capital repayments later in the repayment period.

KEY ASSUMPTIONS
- Revenue increase of 12% for financial year end 2015, mainly attributed to above inflation tariff increases and transhipment volume increases.
- Revenue increase for 2016 and 2017, of 9% and 15%, respectively.
- FCF expected to remain negative due to the increased capex.
- Stable demand profile assumed for export commodities despite the lower global commodity prices.
- Oil tanker jetty project is no longer included in the capex for Namport, the project was taken over by the Namibian Government.
- Draw down of the NAD2.982bn AfDB loan in full before FYE17.
- The expansion project (without the oil tanker jetty) is expected to be completed on time and on budget in 1Q17 (supported by the track record so far). We expect capex of approximately NAD1.2bn per year.
- Government grants of NAD525m to be received before FYE17
- NamPort had NAD722m at financial year-end 2014 (FYE14) in investments which could be used to improve liquidity. In the rating case we assumed that NAD200m will be released in financial year 2016, and NAD100m in financial year 2017.
- NamPort does not plan to pay any dividends in the medium to long term.

RATING SENSITIVITIES
Positive: Future developments that could lead to positive rating action include:
Positive rating action on Namibia's sovereign rating would result in positive rating action on NamPort, providing that the strength of parent subsidiary linkage does not weaken.

Negative: Future developments that could lead to negative rating action include:
- A decline in government support or negative rating action on Namibia's sovereign rating.