Rating Action: Moody’s assigns Ba۳ rating to Global Ports Investments Plc; negative outlook

TIN news:   Moody’s Investors Service, (“Moody’s”) has today assigned a long-term Ba3 corporate family rating and Ba3-PD probability of default rating to stevedore company Global Ports Investments Plc (GPI). This is the first time Moody’s has assigned a rating to GPI. The outlook on all ratings is negative.
A corporate family rating (CFR) is an opinion of the GPI group’s ability to honour its financial obligations and is assigned to GPI as if it had a single class of debt and a single consolidated legal structure.
RATINGS RATIONALE
GPI’s Ba3 CFR is weakly positioned in its current rating category and primarily constrained by challenging economic conditions in Russia, driven by the ongoing low oil price environment. The impact of these exposures on GPI is exacerbated by the company’s concentration on container cargo operations (84% of 2015 revenue), which are very sensitive to variations in Russia’s gross domestic product (GDP), domestic consumption and demand for imports. In 2015, Russia’s GDP fell by around 3.7% and in this period GPI’s container cargo throughput (excluding unconsolidated companies) and revenue declined by around 36% and 28% respectively.
The impact of these exposures is further reinforced by the increasing competition among stevedore companies in GPI’s key region of operations (Russia’s Baltic and Far East sea basins) which in challenging economic conditions creates an increased risk of a downward impact on tariffs and cannibalization of volume by competitors in the next 12-18 months. Moody’s forecasts GPI’s container throughput will fall about 20% in 2016, higher than that of the market, and its domestic market share will fall to 35% (2015: 41%).
These conditions will negatively affect GPI’s operating metrics and limit GPI’s deleveraging (we expect the company’s funds flow from operations (FFO)/debt to reduce to the low teens in percentage terms in 2016 while debt/EBITDA in this period will be close to 5x). The Ba3 CFR incorporates the risk that GPI may breach financial covenants in case of material underperformance from our current expectations unless they are subsequently recalibrated. However, we expect this risk to subside in 2017 due to a modest recovery in GPI’s throughput, as the Russian container market bounces back, and some reduction in GPI’s leverage. Furthermore, in line with previous experience, GPI has a successful track record of renegotiation of covenants with creditors in the past and may be able to negotiate covenant changes with its state owned bank lenders if needed.
However, more positively, GPI’s CFR reflects GPI’s significant scale and leading position in Russia. As of end-2015, GPI had container cargo throughput (including unconsolidated companies) of 1.6 million twenty-foot equivalent units. This makes GPI the number one container terminal operator in Russia. GPI’s CFR also positively reflects the strong geographic position of GPI’s key assets in the strategically important Great Port of St. Petersburg and Vostochny Port in Russia’s Far East. Furthermore, GPI’s CFR reflects material ongoing operational support and potential for extraordinary support in the form of equity injections from key controlling shareholders.
In addition, the CFR takes into account the company’s track record of tight cost control and a flexible cost structure. This will help the company to keep its adjusted EBITDA margin of around 70% in the next 12-18 months despite the challenging economic environment.
Lastly, GPI’s CFR reflects GPI’s reduced need for capital expenditure given that the company’s investment in new capacity has been recently completed and GPI has large spare capacity; and the shareholders decision to suspend dividends. These will support the deleveraging process.
Moody’s anticipates that GPI will maintain a good liquidity position over the next 12-18 months. In this period the company will have positive free cash flow given its low capital expenditure and absence of dividends. The recent issuance of a debut $350 million Eurobond and RUB15 billion (ca. $210 million) of domestic bonds in December 2015-April 2016 enabled the company to retire a significant part of its secured bank loans and reduce refinancing risk over the medium term. As of 30 June 2016, the company had a cash balance of around $120 million, which is sufficient to cover the company’s debt payments over the next 18 months.
RATIONALE FOR THE NEGATIVE OUTLOOK
The negative outlook on the ratings reflects the challenging economic conditions in Russia over the next 12-24 months which may result in cargo volumes falling outside the range of our expectations. This creates a risk that mitigating measures may not be sufficient to allow the company to maintain a financial profile commensurate with the current CFR.
WHAT COULD CHANGE THE RATING UP/DOWN
We do not currently expect any upwards pressure on GPI’s ratings given the negative outlook. However, the outlook could be stabilized if (1) the macroeconomic environment in Russia stabilizes resulting in a recovery of the domestic container cargo market; and (2) the company is able to strengthen its financial metrics in accordance with its financial policy and negotiate any appropriate financial documentation changes with its banks as may be necessary.
Conversely, downward pressure on the ratings could be exerted if the cargo market becomes significantly more challenging than we anticipate, and if this or for other reasons, this were to result in an expected decrease in the company’s FFO/debt ratio below the low teens in percentage terms or its interest coverage ratio (FFO+interest/interest) falls below 2.5 times.
The principal methodology used in these ratings was Privately Managed Port Companies published in July 2016. Please see the Ratings Methodologies page on www.moodys.com for a copy of this methodology.
Global Ports Investments Plc is an operator of container and other port terminals in Russia and the Baltic region. The key shareholders of the company are Transportation Investments Holding Limited (not rated) and APM Terminals, a member of the A.P. Moller-Maersk A/S (Baa1 stable) group, which each own 30.75% of the company’s shares. The company is listed on the London Stock Exchange with 20.5% of the shares held in free float. In 2015, GPI reported $406 million in revenue and $291 million in EBITDA.
REGULATORY DISCLOSURES
For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody’s rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider’s credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.