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

The affirmation of the issuance is based on the successful completion and acceptance of the phase I construction works in September of 2014, volume growth in line with base case forecasts, strong revenue growth and moderate increases in expenses. The port is well positioned to complete the additional investments required to be completed by June 2016 having surpassed the trigger volume of 180,000 of twenty-foot equivalent units (TEUs) in 2014.

KEY RATING DRIVERS

Revenue Risk: Volume - Weaker.
Elevated exposure to volume risk: The Port of Paita is a secondary port of call with considerable concentration in cargo type, business lines, and customers. Despite the improving profitability due to 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 to primarily commodity exports. In addition, the area is subject to material volatility in fishing related exports due to the areas exposure to El Nino related climatic effects.

Revenue Risk - Price: Weaker.
Material price risk: The port revenues are determined under the concession contract with limited flexibility to adjust for increasing costs. A minimum revenue guarantee granted by the government is insufficient to cover debt service payments. Tariffs and fees that are initially established in the concession agreement are subject to regulatory modifications every five years beginning 2019.

Infrastructure Development & Renewal - Midrange.
Reliable facilities renovation program: the project has a well-defined capital improvement planning and funding process, and all investments required by the operator under phase I have been met. In 2014, the port exceeded the volume level established to trigger the phase II investments under the concession contract that must be completed by June 2016. The operator expects to meet the required deadline at a cost well below the USD19 million originally contemplated.

Debt Structure - Midrange.
Adequate structural protections: the project's financial flexibility is mainly sustained by the existence of adequate liquidity reserves available for debt service and/or for construction costs of Phase II and III. The structure includes a five-year principal grace period which incorporates a strong provision to trap cash to prefund investment costs of Phase II and III, and includes a dividend distribution test.

Considerable level of debt: the financing presents a sizable debt burden with 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 reduce the project's financial flexibility.

Adequate Credit Metrics: The transaction has a high amount of leverage and dependence on growth; however, the project's improved profitability and volume growth in 2014 has resulted in an improved net debt to cash flow available for debt service ratio of 8.4x from approximately 10x previously. Average DSCRs for the transaction are high for the rating category at 2.40x and 1.69x under the base and rating cases, respectively. Minimum DSCRs without considering reserves are well below 1.0x under both scenarios and highlight the project's heavy mandatory capex requirements.

PEER COMPARISON
The closest rated peer to Paita in terms of size and regional importance is Commonwealth Port Authority (CPA). Both projects are rated at the 'BB-' level and have weak volume and price risk rating drivers. It should be noted, however, that CPA has a stronger debt structure given its moderate leverage and robust liquidity reserves.

RATING SENSITIVITIES

Negative:

Failure to meet required investments: Should the operator fail to make the necessary investments prior to June 2016, the concession agreement could be terminated.

Substantial decrease in revenues: limited contractual agreements and weaker customer diversification elevates merchant risk, subjecting prices to market volatility.
Positive:
Continued increased profitability: The sustained development of the more profitable special services revenues could improve financial flexibility of the project and reduce the uncertainty surrounding future required investments.

SUMMARY OF CREDIT

The Port of Paita is located in the region of Piura, a small city with low economic activity, 1,030 km 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 works in line with the initial schedule in June 2014, the project entered into full operations following the acceptance from the grantor on September 30. In 2014, the port operated 192,998 TEUs, an increase of 16.3% over the prior year and 0.4% below our original base case projections.

The large growth in 2014 is largely due to the below expectation growth in 2013. The variance in 2013 was primarily driven by negative results in the fishing industry and the agricultural production of grapes and mangos. Meteorologists are currently forecasting an El Nino event in late 2015 which could again negatively affect the ports volumes and profitability in 2016.

The port's revenues increased 15.8% in 2014 over the previous year, surpassing Fitch's original base case projections. The strong revenue growth at the port reflects an increase of activities in energy connections and on-board reefers, which generate a large portion of the unregulated special services revenues. The operator has increased these revenues as part of their primary strategy in order to allow the port to compete with off-site storage facilities that maintain a large market share.

Despite the strong revenue increases, operating expenses increased only 6% to USD16.8 million in 2014 from USD15.8 million the prior year. The resulting Fitch calculated EBITDA was USD13.1 million 17.6% above our projected base case EBITDA for the year.

As established in the concession contract, the port has begun to make deposits into the Phase II account, which is to be funded when 160 thousand TEUs are reached. Investments required under Phase II are to be completed 18 months following the year when at least 180 thousand TEUs are handled. This level was reached in 2014, making the end of June 2016 the mandatory completion date for phase II. The additional investments that need to be completed are comprised of the purchase of additional equipment (2 rubber tired gantries and one crane), the removal of a small sunken fishing ship, and supervisory costs associated with these investments and appear to be conservatively budgeted at USD17 million down from the USD19.3 million initially expected.

Base and Rating Case Descriptions

Fitch's base and rating case scenarios consider increased operations and maintenance costs, two El Nino events that reduce volumes, and a 2% reduction in tariffs in 2019 and a further 1% each five years following to account for the regulatory effect of improved productivity. The container volume CAGRs over the life of the debt are 3.8% and 3.2% 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 negative in some periods under both the base and rating case scenarios. The base case minimum and average DSCR are 0.65x and 2.40x while the rating case minimum and average DSCR are 0.19x and 1.69x. Minimum DSCR for the base and rating case scenarios considering reserves are 2.47x and 1.62x, respectively.