Fitch Expects to Rate Caucedo Investments Inc.'s Senior Notes 'BB-'; Outlook Stable

NEW YORK--()--Fitch Ratings expects to rate Caucedo Investments Inc.'s (Caucedo) US$180 million senior secured notes 'BB-'. The Rating Outlook is Stable.

KEY RATING DRIVERS

--DEMAND RISK PARTIALLY MITIGATED BY PORT'S STRATEGIC IMPORTANCE: Caucedo's geographic location in the Caribbean and adequate intermodal capabilities and inland accessibility enable Caucedo (the port) to lead the port market share in the Dominican Republic. Its proximity to Santo Domingo, the country's main economic center, allows the port to serve local markets efficiently. Greater market participation and strong financial performance have also resulted from DP World's adequate operation and management.

--RATE SETTING FLEXIBILITY HELPS STABILIZE REVENUES: Revenue stability is largely safeguarded by the port's exclusive right to modify tariffs independently. The Dominican Republic's government granted this right through a Concession Agreement, enabling Caucedo to achieve optimal operations, maintenance and to honor its financial obligations. The port has mainly short- to medium-term contracts with 10 major global shipping lines, underpinning its revenue diversification.

--STRONG COMPETITIVE POSITION SUPPORTED BY MODERN INFRASTRUCTURE: Significant recent infrastructure improvements will further strengthen the port's competitive position. Led by experienced counterparties and funded with equity, renovated facilities are aimed at keeping the port's attractiveness to major shipping lines, capturing greater local traffic (Origin and Destination; O&D), and transshipment (HUB) activities. Adequate planning for lesser capital works is in place, including the acquisition of an additional Super Post-Panamax crane, dredging improvements, and additional yard area for future expansion and greater capacity.

--MODERATE DEBT LEVELS FAVOR COMPANY'S OVERALL CREDIT PROFILE: Leverage is congruent with the port's strong revenue profile. Certain growth in cash flows is expected to service the debt within the planned term in Fitch's rating case. Concession agreement renewal in 2024 is likely, given the port's importance to the Dominican Republic and the nature of the concession agreement under a build, own, operate (BOO) scheme. The possible renovation of the concession agreement is considered a mitigant to refinance risk, given the issuance is planned to follow a bullet-style amortization.

--WEAK STRUCTURAL FEATURES COMPARED WITH OTHER PORT TRANSACTIONS: The structure does not include a Major Maintenance Reserve Account (MMRA), customary in other port financings. The proposed debt lacks adequate mechanisms to trap cash for final balloon payment and contemplates weak equity distribution tests, which escalates the refinancing risk. On the other hand, the proposed senior secured debt will rank pari-passu with all other future senior secured debt of the company. Also, the structure includes an Interest Reserve Account (IRA) that covers one coupon (six-months of interest) of the bond. When considering this as a corporate transaction, these features are deemed to be a credit positive.

--RATING CLOSELY LINKED TO DOMINICAN REPUBLIC'S COUNTRY CEILING: Fitch's sovereign rating and country ceiling for the project's host country, the Dominican Republic, reflecting the default risk on sovereign obligations and the transfer and convertibility risk, respectively, are factored into the assigned rating. The following elements, in conjunction, allowed Caucedo's issuance rating to be rated above the country ceiling, as they mitigate transfer and convertibility (T&C) risk: i) strength of the credit profile, ii) ability to generate substantial earnings in debt's denominated currency, and iii) history of preferential treatment by the Sovereign including favorable tax treatment.

POTENTIAL NEGATIVE RATING TRIGGERS:

--Significant decrease in containers (TEU) volumes;

--Increased market share of competing facilities in the region at expense of Caucedo;

--Substantial increase to operating & maintenance costs;

--Considerable reduction of services and/or product diversity;

--Downgrade of Dominican Republic's Sovereign Rating.

POTENTIAL POSITIVE RATING TRIGGERS:

--Substantial improvements to connectivity access (e.g., railroad, roads);

--Sustained economic growth leading to higher domestic demand;

--Upgrade of Dominican Republic's Sovereign Rating.

SECURITY

The issuance will be secured by all of the assets of each of Caucedo and the subsidiary guarantors, excluding any pledge or security interest in the company's or the subsidiary guarantors' bank accounts. The notes are also secured by all rights of ZFM under the Concession Agreement and the Interest Reserve Account.

TRANSACTION SUMMARY

Caucedo expects to issue approximately U.S.$180 million of senior secured notes with a legal maturity in 2022. The notes are to be structured under a bullet amortization scheme, with a fixed interest rate and semi-annual payments.

Proceeds from the issuance are projected to: i) refinance all the outstanding debt balance of US$97.8 million used to improve the project's facilities; ii) fund upcoming capex; iii) complete yard infrastructure and dredging improvements ready for further expansion; iv) pay US$50 million in dividends to shareholders; and (v) to fund the interest reserve account in an amount equal to 100% of the interest payment due and payable on the following interest payment date.

Fitch considers the lack of sinking funds and cash-trap mechanisms significantly increase refinancing risk. However, refinancing risk is partially mitigated by the optional redemption provisions and the long tail sufficient to take another long term financing. According to the Description of the Notes, Caucedo, Zona Franca Multimodal Caucedo (ZFM), and Caucedo Services Inc (CSI) may acquire additional debt as long as combined net debt to combined EBITDA ratio does not exceed 3.5 times (x)on a proforma basis.

Caucedo is an operating port managed by DP World, located in Punta Caucedo, the Dominican Republic, 25 km away from Santo Domingo. Caucedo is the primary port for containerized imports to and exports from the Dominican Republic, where the economy is mostly dependent on imported goods. The port is the second largest container facility within the Caribbean region, and is incorporated within a free trade zone, currently exempted from Dominican Republic income taxes.

The DP World - Caucedo Development Corporation (CDC) joint venture is composed by three entities: Caucedo Investments Inc. (CII), ZFM, and CSI. ZFM was granted a license to operate the port for 50 years under a concession agreement by the Dominican Port Authority in 1999. The license consists of a 10-year period, with automatic renewal at expiration for four consecutive periods. ZFM owns the land and infrastructure facilities at the port. As established in the Concession Agreement, ZFM is to pay US$12.5 per local container, and US$25 per vessel call to the Dominican Port Authority.

OPERATION RISK

ZFM is responsible for operating and maintaining the terminal facility. ZFM has in place an agreement with DP World (Latin America) Management Limited for the management of the terminal, benefiting Caucedo from DP World's global practices. ZFM is wholly owned by CII, a British Virgin Islands (BVI) incorporated entity. CII, as owner of ZFM, is responsible for paying management fees to DP World for managerial services.

ZFM has in place an agreement with DP World (Latin America) Management Limited for various management functions related to the terminal. DP World Management is, in turn, a subsidiary of DP World. DP World's managerial experience, geographic diversification, and market position as one of the largest global container port operators are considered by Fitch as adequate mitigants to operation risk.

CSI, a sister company to CII domiciled in BVI, markets terminal services to shipping lines and captures 83% of the company's revenues. CSI, under a service agreement, pays ZFMC for the services provided to shipping lines plus a 3.0% margin. Revenue generation from these activities takes place in BVI, which in Fitch's opinion partially mitigates convertibility risk.

Fitch considers technology risk at Caucedo as minimal, provided that the equipment, systems, and major cranes employed at Caucedo are proven and widely used in ports globally.

GROSS REVENUE/OFF-TAKE

Caucedo's strategic location in the Caribbean, coupled with modern infrastructure, facilitates the provision of O&D and HUB services. Transshipment activities account for the majority of the operations, representing 62% of total volume (lifts). Caucedo's domestic market participation is substantial, at nearly 53% of the Dominican Republic's total traffic. Local traffic operations represent 68% of total revenue at the port.

The project's revenues are primarily supported by short-term contracts with shipping lines, and container/cargo fees charged to consignees, reducing the exposure to merchant risk. Nearly 83% of the revenues are produced from international shipping lines holding long-term relationship with either DP World, and/or Caucedo in offshore accounts. All revenues are generated in (or pegged to) USD, significantly reducing foreign exchange risk.

FINANCIAL ANALYSIS

Fitch created a base and a rating case for the analysis of this transaction. The base case assumed the following:

--Dominican Republic GDP growth of 4.9% in 2012, 5.7% in 2013, and 4.0% thereafter;

--Domestic inflation of 5.3% in 2012, 5.2% in 2013, and an average of 4.9% from 2014 until 2022;

--U.S. inflation rate of 4.0% during the life of the debt;

--Local traffic volumes which grow at 10% in 2012 and at 3.0% thereafter;

--Transshipment levels which increase at 8.0% in 2012 and 3.0% until maturity of the notes.

Fitch considered the use of Net Debt over EBITDA as the adequate metric to observe the strength of the financial profile due to the bullet-style amortization. Under this base case, maximum Net Debt/EBITDA resulted at 3.11x in 2013 without including beginning balances, with an average of 1.92x.

Fitch's stressed rating case assumed the following:

--Dominican Republic GDP growth of 0% in 2012, 1.7% in 2013, and 2.0% thereafter;

--Domestic inflation of 6.3% in 2012, 6.2% in 2013, and an average of 5.9% from 2014 until 2022;

--U.S. inflation rate of 2% during the life of the debt;

--Local traffic volumes which grow at Dominican Republic's GDP levels (as projected in Fitch's rating case);

--Transshipment levels which increase at 1.0% during the life of the notes.

Maximum Net Debt/EBITDA under this scenario, without including beginning balances, resulted at 5.16x in 2021, with an average of 2.86x. Fitch's analysis, additionally, included a stress scenario with a contraction of transshipment volumes by 15% in a given year. As a result, financial coverage ratios were pressured, but overall financial profile proved to be resilient.

Revenues derived from the construction of the logistics park are not factored in either of the above scenarios.

MACRO RISKS

The Dominican Republic's general economic condition can negatively affect trade volumes, which may result in lower financial flexibility for Caucedo. The jurisdiction and legal risks to which the issuance is exposed are captured by Dominican Republic country ceiling rating of 'B+'. The following specific characteristics, which mitigate transfer and convertibility (T&C) risk, allowed for Caucedo's issuance to be rated above the country ceiling:

STRONG OVERALL CREDIT PROFILE: Consistency in strong cash flow generation underpins the strong liquidity and financial performance of Caucedo. On a stand-alone basis, the transaction could achieve a higher rating than the Dominican Republic's country ceiling of 'B+'. Caucedo's debt rating is closely linked to the Sovereign's rating.

SUBSTANTIAL & RECURRING FOREIGN EXCHANGE EARNINGS RELATIVE TO COMPANY'S FC & OVERALL DEBT BURDEN: Revenues are generated in, or pegged to USD; 83% of earnings are generated in CSI, a British Virgin Islands domiciled company.

HISTORY OF PREFERENTIAL TREATMENT BY THE SOVEREIGN: Historically, the Dominican Republic has exempted Caucedo from past T&C constraints and surrender requirements for export proceeds, and has shown the company favorable tax treatment. Caucedo is the only container dedicated facility in the country. It holds a license to operate the port facility for 10 years starting 2004, with an automatic renovation for four consecutive periods. As proof of government support, the first renovation of the license was confirmed beginning 2014. The government has imposed no capital controls or income taxes to Caucedo. Moreover, the Dominican Republic has a track record of non-interference with strategic sectors, evidenced in the 2004-2005 crises, indicating that the likelihood of the government imposing T&C constraints to the company during the life of the rated debt is low.

Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.

Applicable Criteria and Related Research:

--'Rating Criteria for Infrastructure and Project Finance' (Aug. 16 2011);

--'Rating Criteria for Ports' (Sept. 29, 2011);

--'Rating Corporates Above the Country Ceiling' (Jan. 5, 2011).

Applicable Criteria and Related Research:

Rating Criteria for Infrastructure and Project Finance

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=648832

Rating Criteria for Ports

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=652165

Rating Corporates Above the Country Ceiling

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=594985

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Contacts

Fitch Ratings
Primary Analyst
Omar Valdez, +1-212-908-0713
Associate Director
One State Street Plaza
New York NY 10004
or
Secondary Analyst
Maria Paula Moreno, +57-1-326-9999
Director
or
Committee Chairperson
Glaucia Calp, +57-1-326-9999
Senior Director
or
Media Relations:
Brian Bertsch, +1-212-908-0549
Email: brian.bertsch@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Omar Valdez, +1-212-908-0713
Associate Director
One State Street Plaza
New York NY 10004
or
Secondary Analyst
Maria Paula Moreno, +57-1-326-9999
Director
or
Committee Chairperson
Glaucia Calp, +57-1-326-9999
Senior Director
or
Media Relations:
Brian Bertsch, +1-212-908-0549
Email: brian.bertsch@fitchratings.com