Fitch Rates Global Port 'BB'; FCT's Proposed Notes 'BB(EXP)'
Fitch has also assigned an expected local currency senior unsecured rating of 'BB (EXP)' with a Stable Outlook to the RUB 15bn notes to be issued by First Container Terminal (FCT), a fully-owned subsidiary of GPI. The rating of the FCT's notes is aligned with GPI's Long-term local currency IDR as it benefits from an irrevocable offer to be issued by GPI.
The final ratings are contingent on the receipt of final documents conforming materially to information already received.
KEY RATING DRIVERS FOR GPI
GPI's ratings consider the group's dominant position in the Russian container market and its exposure to the current domestic economic downturn. The ratings also reflect our expectation that GPI's leverage will progressively decline from its current high levels, due to a shareholder-supported zero dividend policy.
The group adopted a holdco-op co corporate and funding structure. Bank loans are currently entirely located at the opco level. We assess the consolidated group credit profile as 'BB+'. The rating of GPI, the hold co, is notched down one notch to 'BB' to reflect the ring-fencing features included in the subsidiaries' bank financing. Lack of committed liquidity lines is a weakness given the back-ended amortisation and increasing bullet profile of group debt.
Volume Risk - Midrange
GPI is Russia's largest container port operator handling 44% share of the country's container throughput. The group dominates the Baltic Sea with a share of regional throughput of 66% as of 1M15, which is 3.5x larger than the second-largest port operator in the basin with an 18% market share. GPI has also a solid footprint in the Far East where the group and its main competitor Fesco each have a third of the market.
GPI can leverage on its portfolio of 10 terminals and 37 berths, which are owned or operated under long-term leasing agreements, to offer a widespread network to shipping lines. The group has long-standing relationships with major shipping companies although contracts in place are short- term, usually one year, and without minimum guaranteed revenue. A.P. Moeller - Maersk Group's twofold role as GPI's customer and indirect shareholder through the APM Terminals is, in our view, a supportive factor of GPI revenue stability.
GPI's throughput is mostly driven by container imports, which are being severely hit by Russia's current economic downturn and reduced consumer spending. In 1H15, the group saw its volume shrink 32%, compared to the 26% fall in the overall Russian container market. This reflects GPI's preference to maintain prices over volumes as well as its large exposure to the Baltic basin, which was hit by the downturn more than Far East and Black Sea Basins.
Under Fitch's rating case, container throughput will drop 34% in 2015 and a further 8% in 2016 (flat in 2017). The downside risk mainly stems from the limited visibility on the long-term evolution of oil prices, rouble performance and, ultimately, Russian economic activity.
Price Risk - Midrange
Price regulation was eliminated for ports located in St. Petersburg in 2010 and for Far East ports in 2012. Tariffs are market-based and have steadily increased over the past six years. Almost all of GPI's tariffs and revenues are in USD and collected directly in USD or at an equivalent amount in rouble. The rouble share of revenue is used to pay costs denominated in local currency with the remainder converted into USD.
Infrastructure Development & Renewal - Stronger
Over 2008-2013 GPI invested heavily in terminal upgrades. These investments brought group capacity to more than 4 million TEU (currently 50% used), a level sufficient to accommodate increasing volumes in the future. On-site connecting infrastructure is well developed and does not need upgrades.
In view of the difficult market environment and sound asset conditions, GPI plans to only carry out maintenance capex over the medium term. Maintenance capex is manageable at around USD25m per year and entirely self-funded through free cash flow (FCF) generation. The presence of APM Terminals, one of the world-largest terminal operators, as a shareholder brings operational expertise and mitigates the risk of cost overrun on capital spending.
Debt Structure - Midrange
The hold co is currently free of debt. The debt structure factor therefore reflects our assessment of consolidated debt, which comprises several loans raised at Russian op co level. These loans are structured as corporate secured debt, are fully USD-denominated post swap and partially guaranteed by GPI. Foreign currency risk on debt is natural hedged as tariffs are set in USD.
Most of the group's borrowings have financial covenants tested at the op co level. In some cases covenants are tested also at the consolidated level in order to induce moderate deleveraging over the next two years (2016: less than 4x; 2017: less than 3.5x).
The debt structure, however, also includes some ring-fencing features, namely financial covenants at single borrower level and some restrictions to infra-group loans, which prevent GPI to be rated in line with our assessment of the consolidated profile of the group..
The debt structure should change over the next few months as GPI plans to tap capital markets to refinance a share of its outstanding debt. The debt quantum should remain broadly unchanged post planned bond issue and we expect overall group debt structure to be fully USD-denominated post swap, partly covenanted with cross default and change-of-control clauses and with a balanced mix of floating and fixed interest rates and bullet and amortising maturities. Should the future debt structure be materially different than our expectation, we may revise our current assessment of debt structure to Weaker from current Midrange.
Lack of committed liquidity lines is a weakness, which the cash buffer held on balance sheet only partly mitigates. Considering GPI's capital plans for the next few months and FCF generated under the rating case, group maturities are covered until end-2019 according to our liquidity analysis that also factors in available cash.
We consider the presence of APM Terminals a well-reputed sponsor with a strong but informal commitment to GPI as a supporting factor in GPI's refinancing process. This kind of soft support is typically observed in businesses where sponsors perceive long-term economic value in the asset and is therefore incentivised to provide support to smooth temporary liquidity shortfalls. A potential change in GPI's ownership may affect Fitch's assessment of the refinancing risk. We also view GPI's listing on London Stock Exchange as a positive factor as it gives GPI additional financial flexibility.
Debt Service
Under Fitch's rating case, we expect GPI net debt to EBITDA to reach 3.9x at YE15. This relatively high leverage ( compared to Russian and Turkish peers) results from the partial debt-funded acquisition of the second-largest Russian container operator in 2013. Deleveraging is a key priority of both GPI management and its controlling shareholders, who are committed to a zero dividend policy until group leverage reaches 2x. Fitch's rating case uses more conservative assumptions than management mainly on volumes, operating and capital spending, interest rates and dividends received from joint ventures. As a result, leverage is expected to fall below 3x over a three-year horizon and further beyond. The rating case does not factor in any shareholder distributions, in line with GPI's stated zero dividend policy.
When running our sensitivity stresses on a variety of factors, notably flat tariff over the next three years and a hypothetical 30% rouble appreciation, we found that, all else being equal, the impact is confined to only a delay to the expected group deleveraging process. This said, the sensitivities also show that a harsher-than-expected drop of container volumes in 2016 (-20% vs. 8% in Fitch rating case) would have a substantial negative impact on projected leverage metrics.
Peers
GPI is around 7x bigger, has stronger market power and shareholder structure and more transparent corporate governance by being listed on the LSE than LLC Deloports (BB-). Deloports is more exposed to competition but has a more balanced export and import mix with grain exports partially offsetting the import-oriented container business. Deloport has lower leverage (1.8x) than GPI (3.9x) but its volume risk assessment is weaker compared with Midrange for GPI.
Mersin (BBB-/Stable) has a similar size to GPI (1.5 million TEU) and, like GPI, plays a dominant role in its home market. Its cargo import and export mix is more balanced than GPI, which is more exposed to the Russian recessionary environment. Mersin's lower leverage (max/average 2.6x/2.4x) than GPI (3.9x/3.0x) supports its higher rating.
KEY RATING DRIVERS FOR FCT's BONDS
Fitch aligned the rating of the FCT's notes with GPI's Long-term local currency IDR due to the benefit of the irrevocable offer to be issued by GPI.
GPI's Op co to Issue Bonds
FCT is one of GPI's main operating subsidiaries. It plans to issue three series of RUB5bn notes swapped in USD under a RUB30bn domestic bond programme. FCT is a 100%-owned GPI subsidiary, fully consolidated in the group accounts, and generates around 35% of GPI's operating cash flow. Outside of the GPI group, FCT is a fairly small player with little market power and exposed to competition. Under Fitch rating case, we expect its leverage at the end of the forecast period (2020) to be close to a high 4x.
Irrevocable Offer
Bondholders will benefit from an irrevocable offer to be issued by GPI. Under this offer, GPI irrevocably and publicly undertakes to purchase the bond following non-payment of interest or principal. This obligation ranks pari-passu with all other direct, unsecured GPI obligations.
If and when the bondholder accepts the offer, it turns into a sale and purchase agreement of the bond where GPI is obliged to pay principal, coupon and accrued interest on the 13th business day after non-payment of the rated bond. The mechanism of irrevocable offer brings the probability of default of the rated bond in line with that of the parent GPI. Under this structure, the parent is strongly incentivised to financially support the issuing entity before it defaults linking the probability of default of the rated bond and GPI. As a result, Fitch has assigned the proposed notes an expected local currency senior unsecured rating in line with GPI's Long-term local currency IDR.
Bonds Proceeds for Refinancing
The bonds' proceeds are intended to be used for refinancing FCT's outstanding bank loans. GPI's consolidated leverage therefore will not increase as a result of this transaction.
RATING SENSITIVITIES
Future development that could lead to negative rating actions include:
-Dividend distributions impacting the GPI's expected deleveraging profile
-Fitch-adjusted consolidated Debt/EBITDA remaining above 3.0x over a three-year horizon by 2018 in the Fitch rating case
-Adverse policy decisions or geopolitical events affecting the port sector
-Failure to maintain adequate liquidity to cover its debt service maturities
-Failure to comply with covenants at op cos and consolidated levels
-An unbalanced mix between bullet and amortising debt and/or a potential change in shareholders structure with APMT disposing partly or entirely its co-controlling stake in GPI, which may affect our analysis of some rating factors such as refinancing risk and potentially GPI's ratings.
Rating upside potential is currently limited. We do not expect improvement in the Russian economy in the near term, as indicated by the Negative Outlook on Russia's sovereign rating.
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