NEW YORK--(BUSINESS WIRE)--Fitch Ratings affirms Terminales Portuarios Euroandinos (TPE) USD110 million senior secured notes at 'BB-'. The Rating Outlook is Stable.
The affirmation of the 'BB-' rating is based on completion of the expansion project on a timely basis and financial performance generally consistent with base case expectations. Flat growth in container volumes in 2013 appears to be rebounding in the first quarter 2014 (1Q'14). Volume and price risk remain the primary risk exposures and are mitigated by the high average coverage ratios, liquidity, and structural protections.
KEY RATING DRIVERS
Concentrated and Volatile Traffic - Volume Risk: Weaker
The Port of Paita is a secondary port of call with considerable concentration in cargo type, business lines, and customers. Far from major economic centers, the port is exposed to cargo volatility, as contractual agreements with shipping lines are limited and access to overland transportation infrastructure is modest.
Limited Tariff Flexibility - Price Risk: Weaker
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 may be subject to regulatory modifications beginning 2019.
Reliable Facilities Renovation Program - Infrastructure Development & Renewal: Midrange
The project expansion (Phase I of IV) required under the concession agreement was completed on time in June and is expected to begin operations in September following acceptance by the grantor. The project has a well-defined capital improvement planning and funding process, and the bulk of investments required by the operator have been met. Additional investments to infrastructure facilities required under the concession agreement are contingent on future growth and budgeted in the financial projections.
Adequate Structural Protections - Debt Structure: Stronger
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.
Projected Fitch Rating Case average debt service coverage ratio (DSCR) is 1.67x through 2037 with significant variability arising from mandatory investments under the concession contract. The minimum DSCR of 0.19x projected to occur in 2026 is mitigated by mandatory reserving and cash traps. The credit quality is commensurate with the rating despite the low minimum as illustrated by the 1.47x minimum DSCR including reserves and the rating case loan-life coverage ratio (LLCR) of 1.32x.
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.
Negative - Sustained failure to meet volume growth estimates could place additional pressure on coverage ratios and limit capacity to make necessary investments and result in a downgrade.
Positive - Sustained multi-year traffic increases and further development of special services revenue providing consistent base-line revenues could lead to an upgrade.
The bonds are secured by the pledge of all capital stock of the issuer, a mortgage between the issuer and sub-collateral agent, and a perfected security interest in all of the issuer's assets.
In 2013, the port operated 166,016 of 20-foot equivalent units (TEUs), an increase of 0.3% over the prior year and 7.8% below Fitch's base case projections. The variance was primarily driven by the declines in the local fishing industry and the agricultural production of grapes and mango. The port's revenues, however, grew 11.8% in 2013 over the previous year, and surpassed Fitch's base case projections by 6.4%. Revenue growth at the port reflects an increase of activities in energy connections and on-board reefers, which generate a large portion of the special services revenues. The operator expects these revenues to continue to grow with the additional storage capacity available with the expansion. This will allow the port to compete with off-site storage facilities that maintain a large market share.
Operating expenses increased to USD15 million in 2013 from USD13 million the prior year and were driven by the increase in special services. The resulting EBITDA was USD10 million, USD 1.5 million under the projected base case EBITDA for the year. During 1Q'14, the port has operated nearly 52,000 TEUs, an increase of 19% over the same period in 2013. Operating revenues were USD8.5 million in 1Q'14, representing a 29.7% increase over 1Q'13. Meanwhile, operating expenses were USD3.5 million for 1Q'14, approximately 16.9% higher than the period one year earlier.
Construction works have advanced in line with the initial schedule with completion of Phase I of IV being declared in June 2014, on schedule with completion costs according to budget. The expansion is expected to begin operations in September following acceptance from the grantor. As established in the concession contract, the port has also begun to make deposits into the Phase II account, which is to be funded when 160,000 TEUs are reached. Investments required under Phase II are to be completed 18 months following the year when at least 180,000 TEUs are handled.
The port 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.
Additional information is available at 'www.fitchratings.com'
Applicable Criteria and Related Research:
--'Rating Criteria for Infrastructure and Project Finance' July 12, 2012;
--'Rating Criteria for Ports' Oct. 3, 2013.
Applicable Criteria and Related Research:
Rating Criteria for Ports
Rating Criteria for Infrastructure and Project Finance