Fitch Ratings has upgraded Russia-based Far-Eastern Shipping Company Plc’s (FESCO) Long-Term Foreign-Currency Issuer Default Rating (IDR) to ‘CCC’ from ‘RD’ (Restricted Default). Fitch has also upgraded FESCO’s senior unsecured rating to ‘CC’ from ‘C’ with a Recovery Rating of ‘RR6’.
The ‘CCC’ IDR reflects FESCO’s improved financial flexibility following the restructuring of the company’s debt, weak liquidity, expected covenant breaches and FX risks. Fitch also expects that FESCO’s credit metrics will spike in 2020 as a result of a weaker demand caused by the coronavirus-related lockdown and will gradually improve from 2021, when economies re-open and demand returns. We also project FESCO to generate negative to neutral free cash flow (FCF), which might be insufficient to cover maturities under the current repayment schedule.
KEY RATING DRIVERS
Weak Liquidity: At end-2019 FESCO’s cash and cash equivalents of RUB1.2 billion and net proceeds from asset sales and leaseback of vessels totalling RUB4.7 billion (in 2020) were insufficient to cover short-term maturity of RUB6.1 billion (mostly related to a VTB Bank loan repayment) and Fitch-expected negative FCF (before disposals) of RUB3.4 billion for 2020. This is more conservative than management’s estimates and based on more significant volumes decline.
The Fitch-estimated liquidity score of minus 0.4x in addition to high reliance on one lender are reflected in the ‘CCC’ IDR. FESCO has also uncommitted credit lines from VTB Leasing, and uncommitted credit facilities from other local banks, which we do not factor into our liquidity analysis.
Loan Terms Re-Negotiation: Management is considering re-negotiating its loan with VTB and expects the extension of final loan maturities from 2022 to 2024, with a significant decrease in the US dollar-denominated portion of loan.
Potential Covenant Breach: Fitch expects deterioration of the financial profile in 2020 following macro-economic challenges as a result of the COVID-19 pandemic, which could pressure the VTB loan covenant during 2020-2022 of net debt/EBITDA of 4.0x-4.5x and EBITDA/interest of 2.2x-2.5x. Fitch projects FESCO’s funds from operations (FFO) net adjusted leverage will peak in 2020 at 5.5x (about 4x in 2019) and slightly improve to 4.3x in 2021. We also expect FFO fixed-charge coverage to average 1.5x (1.4x in 2019) during 2020-2024 due to expected EBITDA decline in 2020 and high interest rate on its secured loan from VTB Bank.
Rouble Bonds Repayment: In 2017-2018, the company repaid its outstanding Eurobonds and most of its rouble bonds, including coupons, with a secured loan from VTB. FESCO’s non-repaid debt amounts to RUB252 million (0.8% from total debt as of end-2019), which is related to Russian rouble bonds held by individuals, which have substantial tax non-payment arrears in Russia. The repayment in favour of these individuals before the end of litigation might be recognised as payment to the improper creditor.
Fitch understands that FESCO is able and ready to fully repay the bonds as soon as it becomes technically possible without unacceptable legal risks. The company expects to finalise the buyback of the remaining bonds by end-2020.
COVID-19 Disruption to Pressure 2020: Fitch expects FESCO’s major divisions’ transportation volumes to decline in 2020, in turn affecting EBITDA and credit metrics. We estimate the COVID-19 pandemic will impact both local and Asian markets consumption, which could affect the majority of company’s import-export and transit operations. Fitch has conservatively assumed in its rating case that FESCO’s containers and general cargoes handling volumes as well as rail cargo turnover fall by an average 15%-20% yoy in 2020, before starting to gradually recover from 2021, which is more conservative than management’s estimates.
FX Exposure: FESCO is significantly less exposed to foreign currency fluctuations following the refinancing of Eurobonds with a secured loan from VTB totalling USD518 million (as of end-2019) due in 2022, which is denominated in Russian roubles and US dollars. Around 50% of its total debt was denominated in foreign currencies at end-2019 (84% in 2015), while around 50% of EBITDA was US dollar-denominated during the same period. Although the currency mismatch has narrowed, FESCO’s FX risk remains higher than other Fitch-rated peers.
FESCO is a transportation and logistics company in Russia with operations in ports, rail, integrated logistics and shipping. The company is more operationally diversified than peers. However, FESCO has a weaker financial profile than peers such as PJSC TransContainer (BB-/Rating Watch Negative), Sovcomflot (BB+/Stable, with Standalone Credit Profile assessment at ‘bb’), Globaltrans Investment Plc (BBB-/Stable) and PJSC Freight One (BBB-/Stable), on the back of higher leverage, weaker liquidity profile and greater FX risk.
Fitch’s Key Assumptions Within Our Rating Case for the Issuer:
– EBITDA margin to decline to 13% in 2020, which is more conservative than management’s expectations
– Capex averaging RUB3 billion annually over 2020-2024
– Zero dividends
KEY RECOVERY RATING ASSUMPTIONS
– The recovery analysis assumes that FESCO would be a going concern in bankruptcy and that the company would be reorganised rather than liquidated
– We have assumed a 10% administrative claim
– The going-concern EBITDA is 30% below 2019 EBITDA. The discount reflects risks associated with the potential weakening of financial profile and macro-economic challenges as a result of the COVID-19 pandemic.
– An enterprise value multiple of 5.0x.
– Financial leases not considered in the recovery waterfall
– The waterfall results in zero recovery corresponding to a Recovery Rating ‘RR6’ for the senior unsecured debt at FESCO level.
Factors that could, individually or collectively, lead to positive rating action/upgrade:
A structural improvement in liquidity (liquidity score above 1.0x) or demonstrated ability to secure near-term maturities.
Proven record of repaying debt maturities coming due or refinancing at market terms.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
Deteriorated liquidity due to the inability to secure funding and obtain waivers on any potential covenant breach.
BEST/WORST CASE RATING SCENARIO
International scale credit ratings of Non-Financial Corporate 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 four 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.
Source: Fitch Ratings