OREANDA-NEWS. Fitch Ratings has assigned LLC DeloPorts' planned RUB3bn bond a 'BB-(EXP)' expected rating. The Outlook is Stable. Simultaneously, Fitch has affirmed DeloPorts' Issuer Default Rating (IDR) at 'BB-' with a Stable Outlook.

The affirmation of the IDR follows a review of Deloports' expected performance with the addition of the planned bond. The consolidated credit profile of the group, which we assessed at 'BB', has become somewhat weaker on the basis of Fitch's updated projections due to lower container volumes and lower grain tariffs forecasted from 2015 onwards. Debt/EBITDA is now forecasted to peak at 2.6x in 2017 under Fitch's rating case, which is just over the negative rating trigger of 2.5x, and anticipated to decline from thereon. These forecasts indicate limited headroom in the rating. However, Fitch's rating case is regarded as conservative and the affirmation is based on YTD performance in 2015 and management's expectation for the whole year, which are within Fitch's expectations.

DeloPorts' rating is notched down from the consolidated profile by one notch in accordance with Fitch's 'Parent and Subsidiary Rating Linkage' criteria. This reflects the holding company debt's structural subordination and the legal ties between DeloPorts and its subsidiaries that are not sufficiently strong. The bond's expected rating is aligned with that of DeloPorts.

KEY RATING DRIVERS
Volume Risk - Weaker
DeloPorts' concentrated exposure to one commodity (grain), short-term contracting and dynamic competitive environment underpin the weaker assessment. DeloPorts' two key business segments are the handling of containers (40% of EBITDA in 2014) and the export of Russian grain (52% of EBITDA in 2014). The two segments are characterised by different volume drivers, which balance each other out to some extent. The container segment is mostly import-oriented and throughput is diversified, while the grain segment is fully export-oriented and relies on one commodity type.

Economic growth and purchasing power are currently under stress and based on 9M15 results, DeloPorts' container volumes have fallen by 23% (in TEUs; 20-foot equivalent units), more than the 16% decline assumed under Fitch's rating case for 2015.

Conversely, grain export volumes in 9M15 were better than Fitch's expectations, albeit still lower than in 2014, which was an exceptionally good harvest year. Grain production may be affected by weather conditions and exports are subject to Russia's policy decisions. Fitch considers these drivers to be less predictable and more volatile than the diversified trade in the container segment. However, exports are currently beneficial to Russian producers compared with domestic sales following severe rouble devaluation in 2014.

Price Risk - Midrange
In 2013 price regulation was eliminated in most Russian ports, giving DeloPorts the ability to manage tariffs independently. However, one of its subsidiaries, NUTEP, has not been formally excluded from the register of natural monopolies in transport. Tariffs have been relatively stable post de-regulation, although in 2015 DeloPorts lowered its grain handling tariff by about 15%. All tariffs are currently set in US dollars. A stronger assessment for Price risk was precluded due to the limited history of tariff and revenue stability and lack of minimum price guarantees.

Infrastructure Development and Renewal - Stronger
DeloPorts' assets are greenfield and the current capacities of both container terminal and grain terminal are sufficient to accommodate increased volumes. No significant maintenance capex is expected over the medium term. Both grain and container terminals aim to increase their capacity. In 2H15, DeloPorts announced that it is going ahead with the expansion project to build Berth 38 at NUTEP that will be able to receive larger vessels. We understand that this investment can be delayed, if needed.

Debt Structure - Midrange
Debt structure is still regarded as Midrange for consolidated group with the addition of the planned RUB3bn bond. The bond will represent about 35% of the consolidated group's debt at YE15, with the other 65% made up of USD bank loans at the operating subsidiaries KSK and NUTEP.

The group's overall debt structure becomes somewhat weaker with the bullet repayment style and associated refinancing risk, as well as the weakening of the covenant package. The bond will be unsecured and will have no covenants, apart from bondholders' right to put the bond back in case of non-payment within 30 days by DeloPorts or any of the companies consolidated within the group (i.e. NUTEP, TOS, KSK) of its bank loan obligations if the delayed principal amount is above USD10m. This is essentially a cross-default feature with the existing bank obligations of NUTEP and KSK, signifying some degree of legal ties between the parent and the subsidiaries, although it would only be effective after several quarters of missed bank loan repayments. The exact maturity of the bond is not known at this stage, but is two to three years based on company's expectations. The re-financing risk of the bond in a few years' time is considered manageable.

Positively, the bond will reduce the company's exposure to floating interest rates and diversify the company's debt in terms of currency exposure.

The existing debt of the subsidiary companies consists of senior secured loan facilities, maturing in 2016 (KSK) and 2018 (NUTEP). There is a full exposure to floating interest rate (USD LIBOR) under both loans. The loans are structured as corporate secured debt with some terms and conditions differing across the two loans. Debt/EBITDA covenant is 4.5x for NUTEP and 5x for KSK. Foreign currency risk on subsidiary debt is naturally hedged as all tariffs are denominated in US dollars. There is a short-term currency conversion risk as most of the revenues are collected in roubles (based on current exchange rates) and then converted to US dollars within a short time frame.

Debt Service
Total debt/EBITDA is expected to reach 1.8x at YE15 with the issuance of the new bond under Fitch's rating case, which forecasts EBITDA of USD71m. The company's maximum leverage is now forecast to be significantly higher than previously anticipated (2.6x in 2017 vs 1.45x) under the revised Fitch rating case, which incorporates lower container volumes and lower grain tariffs from 2015, as well as RUB/USD exchange rate of 70, among other stresses. As indicated by the conservative Fitch rating case (which assumes a 24% decline in 2016 EBITDA levels compared to 2015 expectations), 2016 may also be a stress year due to high debt service payments as the KSK loan will fully amortise by the end of the year and high interest payments will start under the new rouble bond.

RATING SENSITIVITIES
Further new debt issued by DeloPorts that would result in a Weaker debt structure assessment could be negative for the rating. Likewise, consolidated debt/EBITDA close to or exceeding 2.5x would result in negative rating action.

Adverse policy decisions on grain exports or economic environment in Russia deteriorating significantly beyond Fitch's current expectations could be negative for the rating. Finally, if the company does not monitor its foreign currency exposure conservatively, this may also result in negative rating action.

Rating upside potential is currently limited. We do not expect improvement in the Russian economy this year, as indicated by the Negative Outlook on Russia's sovereign rating.

SUMMARY OF CREDIT
LLC DeloPorts is a privately-held Russian holding company that owns and operates several stevedoring assets in the largest Russian port of Novorossiysk. Its two main subsidiaries are the container terminal NUTEP (where DeloPorts holds 100%) and the grain terminal KSK (where Deloports holds 75% - 1 share).