Fitch Ratings has affirmed EP BCo S.A.’s (EP) Long-Term Issuer Default Rating (IDR) at ‘BB-‘ with Negative Outlook. A full list of ratings is below.
EP is the financing vehicle and the sole shareholder of Euroports Holdings Sarl (Euroports), a large, deep-sea port terminal operator in Europe and China.
The Negative Outlook reflects the ongoing uncertainty around Europort’s credit profile given the uncertain nature of the timing of and recovery from the global coronavirus shock. In the Fitch rating case (FRC), the group will be impacted by a severe but fairly short-lived demand shock related to the pandemic. Liquidity position is solid as Euroports has no bullet maturities until 2027. Euroports also has some financial flexibility to partially offset the expected short-term revenue shortfall.
Fitch currently assumes Euroports to progressively recover from the 2020 shock by 2021 but if the severity and duration of the outbreak is worse than expected the rating case will be revised accordingly.
The IDR of Euroports reflects stable cash flows from its mature terminals concentrated in the commodity sector but also its bullet debt structure, which entails refinancing risk. Its long-standing relationships with a diversified customer base mitigate limited visibility on future cash flow, especially from terminals under development. Euroports’ portfolio of 15 terminal areas is strategically located close to production and consumption centres and benefits from good hinterland and multi-modal connectivity. The portfolio comprises mature assets, such as German and Finnish terminals, as well as terminal projects under development that are backed, in some cases, by long-term contracts. Customer concentration is moderate.
KEY RATING DRIVERS
Coronavirus Affecting Demand
The rapid spread of coronavirus is leading to an unprecedented impact on cargoes’ mobility. Until May Euroports had been resilient and EBITDA generation had been in line with our expectations. Under our revised FRC, however, we assume considerable volume contraction in 2020 and a gradual recovery by 2021.
Euroports has some balance-sheet flexibility as well as a proven ability to reduce operating costs in case of a revenue shortfall. Fitch expects capex to be scaled back as the group has already implemented some of its growth capex. Some of the non-safety maintenance and growth initiatives originally planned for 2020 will now be deferred. In FRC, we assume a 20% reduction in growth capex in 2020 and higher adjustments to planned capex over 2021-2022.
Credit Metrics Recovery from 2021
Under the updated FRC, after a forecast 2020 increase, Euroports’ leverage will progressively return to within our current rating sensitivity during 2021-2024, indicating only a temporary impairment of its credit profile. The resulting Fitch-adjusted gross debt/EBITDAR will peak in 2020 before progressively deleveraging to around 6x over 2021-2024.
We are closely monitoring developments in the sector and will revise the FRC in case the severity and duration of coronavirus is worse-than-expected.
Euroports’ cash balance at 1 June 2020 was around EUR40 million. It also had an undrawn amount of EUR27 million in the revolving credit facility (RCF). Moreover, Euroports does not have material upcoming debt maturities. Apart from its syndicated loans, which have a maturity of seven to eight years, its only debt maturities are on average EUR8 million a year of financial leases. Liquidity is sufficiently strong to cover the upcoming commitments.
We also run a sensitivity case with a more severe volume drop in 2020 compared with the FRC and where we assume a linear recovery to 2019 levels by 2024. Mitigation measures are similar to the FRC. Under this scenario, after its peak in 2020 leverage will decrease but remain well above our downgrade trigger.
As part of the transaction review we have completed a review of the Key Rating Drivers assessed below.
– Volume Risk: ‘Midrange’
– Price Risk: ‘Midrange’
– Infrastructure/Renewable Risk: ‘Midrange’
– Debt Structure: ‘Weaker’
Factors that could, individually or collectively, lead to negative rating action/downgrade:
-Projected Fitch-adjusted gross debt/EBITDAR above 6x on a sustained basis
Factors that could, individually or collectively, lead to positive rating action/upgrade:
-Fitch does not anticipate an upgrade as reflected in the Negative Outlook. Quicker-than-assumed recovery from the pandemic supporting sustained credit metric recovery to levels stronger than outlined in the negative sensitivities would lead to the Outlook being revised to Stable.
The highest level of ESG credit relevance, if present, is a score of 3. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity(ies), either due to their nature or to the way in which they are being managed by the entity(ies).
BEST/WORST CASE RATING SCENARIO
International scale credit ratings of Sovereigns, Public Finance and Infrastructure issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of three notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from ‘AAA’ to ‘D’. Best- and worst-case scenario credit ratings are based on historical performance.
In February 2019, a consortium led by MRG, an international natural resource group with a 53% stake, and including a Belgian Regional (PMV) and Federal (SFPI-FPIM) Sovereign wealth funds, agreed to acquire Euroports. EP is the company issuing the term loans to fund the acquisition.
The outbreak of coronavirus and related government containment measures worldwide create an uncertain global environment for the ports sector. While Euroports’ most recently available data may not have indicated performance impairment, material changes in revenue and cost profile are occurring across the ports sector and will continue to evolve as economic activity and government restrictions respond to the pandemic. Fitch’s ratings are forward-looking in nature, and Fitch will monitor developments in the sector as a result of the virus outbreak for its severity and duration, and incorporate revised base- and rating-case qualitative and quantitative inputs based on expectations for future performance and assessment of key risks.
The recovery rating prospects are key credit features in this transaction where the first and second lien term loans have the same probability of default (due to a cross default clause) but different recovery prospects. Therefore, to rate this transaction, Fitch is applying the principles underlying the recovery analysis methodology to determine a recovery rating and instrument ratings; the first lien is notched up from the IDR by one notch due to high recovery prospects, while the second lien is notched down two levels due to 0% recovery prospects.
Key Recovery Assumptions
The recovery analysis assumes that Euroports would remain a going concern in restructuring and that it would be reorganised rather than liquidated. We have assumed a 10% administrative claim in the recovery analysis.
–The recovery analysis assumes a 20% discount to Euroports’ OEBITDA as of end-2019.
–Fitch also assumes a distressed multiple of 6.5x and a fully drawn EUR45 million RCF.
–These assumptions result in a recovery rate for the first-lien term loan and RCF within the ‘RR2’ range to allow a one-notch uplift to the debt rating from the IDR. The recovery rate for the second-lien term loan is within the ‘RR6’ range and leads to a downward adjustment of two notches from the IDR.
Source: Fitch Ratings