Fitch Ratings has assigned DP World PLC’s (DWP; BBB-‘/Stable) hybrid instruments and DP World Salaam Limited’s (DWPS) hybrid Sukuk instruments expected ratings of ‘BB(EXP)’. The Outlook is Stable.
Final ratings are contingent on the receipt of final documents conforming materially to the preliminary documentation reviewed.
The perpetual hybrid issue will be deeply subordinated, senior only to DPW’s share capital, while profit payments can be deferred at the discretion of the issuer. As a result, the ‘BB(EXP)’/Stable rating is two notches below DPW’s ‘Issuer Default Rating (IDR) reflecting the notes’ higher risk of non-performance relative to senior obligations. The proposed securities qualify for 50% equity credit as they are fully subordinated with limited dissolution events; its remaining effective maturity is more than five years, and DPW has full discretion to defer periodic profit distributions for at least five years. Deferrals of profit distributions would be cumulative and compounding. Based on Fitch’s analysis of the company’s economic incentives of the hybrid issuance and discussions with management, the agency believes that the profit rate step up of 100bp at year 10.5 would likely be an effective maturity of the instrument, and Fitch has therefore given equity credit for 5.5 years.
DPWis being taken private. Its parent company, Port and Freezone World FZE (PFZW, together with DPW, the group) is in the process of buying back the 19.55% minority shareholding in DPW, taking the company private and re-leveraging the group. The transaction is expected to complete by the end of June. DPW has surpassed the threshold needed to squeeze out minorities, allowing for more visibility on its medium-term capital structure. In line with its deleveraging plans, the issuer is looking to issue a subordinated perpetual Sukuk instrument in US dollars.
KEY RATING DRIVERS
Fitch expects DPW’s leverage to peak in 2020 following the transaction and deleverage over the next three to five years. The deleveraging path could be faster if the company uses tools such as monetisation of minority stakes and the reduction/deferral of dividends, capex and M&A activities.
The outbreak of coronavirus and related government containment measures worldwide create an uncertain global environment for the Transportation sector. While DPW’s performance data through most recently available issuer data may not have indicated impairment, material changes in revenue and cost profile are occurring across the Transportation sector and will continue to evolve as economic activity and government restrictions respond to the ongoing situation. Fitch’s ratings are forward-looking in nature, and Fitch will monitor developments in the sector as a result of the coronavirus outbreak as for their 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.
Hybrid Sukuk Instrument: Debt Structure: Weaker
The proposed securities qualify for 50% equity credit.
The hybrid instrument’s weaker structural features compared with DPW’s senior debt include deferability of profit distributions and the increased risk of non-performance relative to senior obligations.
The subordinated perpetual certificates’ rating is driven by DPW’s IDR and senior unsecured ratings of ‘BBB-‘/Stable, and notched down by two notches. This reflects Fitch’s view that a risk of default of the hybrid Sukuk is linked to that of DPW in accordance with Fitch’s rating definitions. The rating is thus linked to DPW’s Long-Term IDR. The rating may also be sensitive to changes to the roles and obligations of DPW under the Sukuk’s structure and documents.
Fitch has not considered any underlying assets or collateral provided, as it believes that DPWS ability to satisfy payments due on the certificates will ultimately depend on DPW satisfying its unsecured payment obligations to the issuer under the transaction documents. This is especially, but not exclusively, due to the features explained below:
DPW, as the Mudareb, may elect, in its sole and absolute discretion, not to pay the relevant mudaraba profit to DPWS on any mudaraba profit distribution date. As a result of such deferral election, DPWS, as the Trustee, shall not make payment of the relevant periodic distribution amount to the certificateholders on the corresponding periodic distribution date.
Unless a deferral election has occurred, on each mudaraba profit distribution date and on the basis of a liquidation of the mudaraba by DPW, DPW shall distribute the mudaraba profit (if any) for the relevant mudaraba profit distribution period between DPWS and DPW in accordance with an agreed profit sharing ratio (95%. to DPWS and 5% to DPW) and pay to DPWS its share of the mudaraba profit. DPWS shall apply its share of the profit (if any) generated by the mudaraba on each periodic distribution date to pay the periodic distribution amount due to the certificateholders on such date.
DPW shall ensure that the value at all times of the mudaraba assets is not less than the required liquidation amount. The required liquidation amount is equal to the sum of: (a) the face amount of the outstanding certificates; (b) the Rab-al-Maal final mudaraba profit; and (c) unpaid deferred mudaraba profit amounts (if any) at that time.
DPW as the Mudareb will be required to appoint a Shari’a board and shall endeavor that such adviser conducts an annual Shari’a review of the operations of the mudaraba and the mudaraba accounts and the Shari’a board shall deliver its annual report to the Mudareb as soon as possible following such a Shari’a review. Documentation does not include credit triggers or credit events for non- Shari’a compliance.
Certain aspects of the transaction will be governed by English law, while others are governed by DIFC law and Cayman Islands law. Fitch does not express an opinion on whether the relevant transaction documents are enforceable under any applicable law. However, Fitch’s rating on the certificates reflects the agency’s belief that DPW would stand behind its obligations.
When assigning ratings to the certificates to be issued, Fitch does not express an opinion on certificates’ compliance with Shari’a principles. The subordinated certificates’ rating is sensitive to changes in DPW’s Long-Term IDR, from which it is notched.
Factors that could, individually or collectively, lead to positive rating action/upgrade:
–Group consolidated Fitch-adjusted net debt on EBITDAR sustainably below 5.5x under Fitch’s rating case.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
–Group consolidated Fitch-adjusted net debt on EBITDAR sustainably above 6.5x under Fitch’s rating case.
BEST/WORST CASE RATING SCENARIO
International scale credit ratings of Public Finance 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.
The analysis includes a variation from the “Rating Criteria for Infrastructure and Project Finance” to determine how to notch the hybrid instruments relative to the issuer’s Issuer Default Rating and how to apply the equity credit.
Source: DP World