Fitch Ratings has affirmed Australia-based Port of Newcastle Investments (Financing) Pty Ltd’s (PON) Long-Term Foreign-Currency Issuer Default Rating (IDR) at ‘BBB-‘. The Outlook is Stable. A full list of rating actions is at the end of this commentary.
RATING RATIONALE
The rating on PON reflects the consolidated profile of the Port of Newcastle group and is supported by the long-term stability of PON’s cash flow, which is underpinned by its competitive strength in the coal supply chain. The rating also considers PON’s current high concentration of trade in a single commodity, thermal coal, although it benefits from substantial contracted revenue and stable historical throughput levels.
In the short to medium term, Fitch expects PON’s export volume to be supported by increasing demand for high-quality coal from south-east Asia and India. However, in the longer term, PON will face rising environmental, social and governance (ESG) concerns over its heavy reliance on coal.
This risk could ease as PON has started implementing an extensive expansion plan to diversify its revenue streams away from coal, although there is uncertainty as to whether it will successfully reduce its reliance on coal. Fitch recognises that PON will benefit from the growth in its service region, existing deepwater harbour, available land and intermodal links that support its expansion plan.
Net debt/EBITDA in Fitch’s rating case between 2022-2026 indicates the group will deleverage from 8.9x in 2022 to 6.5x in 2026 with a five-year average of 7.4x. The financial profile is commensurate with a rating of ‘BBB-‘.
KEY RATING DRIVERS
Gateway to Coal Export Markets (Revenue Risk – Volume: Revised to High-Midrange from Midrange): PON is the only export port with efficient infrastructure and established connectivity serving the Hunter Valley mining region in Australia. Its high coal exposure is mitigated by the stable thermal and metallurgical coal supply, which is underpinned by 10-year evergreen marketable reserve requirements at its two coal terminals. Volume will be supported by increasing demand for high-quality coal from Asia over the medium term.
Fitch has revised its assessment of Revenue Risk (Volume) to ‘High Midrange’ from ‘Midrange’ following the publication of its new Transportation Infrastructure Rating Criteria, which assess volume risk on a five-point scale with six sub-factors. PON achieved a ‘Stronger’ assessment for strategic importance, competition, and relative cost to end users; a ‘Weaker’ assessment for diversification; and ‘Midrange’ score for the remaining sub-factors.
Long-Term Contracts (Revenue Risk – Price: Stronger): PON benefits from the landlord operation model, where 76% of contracted revenue is under long-term, fixed-price agreements, with the majority providing inflation protection. PON is able to fix the amount of statutory charges, subject to the terms of any long-term agreements.
This was evident after the Australian Competition Tribunal resolved an access dispute with Glencore plc in PON’s favour in April 2022, after earlier affirming the Treasurer’s decision not to re-declare the port service under the National Access Regime. It also set aside the Australian Competition and Consumer Commission’s 2020 authorisation of collective bargaining by mining companies.
Extensive but Flexible Capex Plan (Infrastructure Development and Renewal: Midrange): PON has around AUD500 million plan to diversify revenue away from coal over the next 10 years. PON will prioritise the use of free cash flow to fund the expansion over distribution. It has no material contractual obligations and has high flexibility to defer its expansion. However, the assessment is limited to ‘Midrange’ by pressure on PON to reduce its reliance on coal in the longer term.
Refinancing Risk (Debt Structure: Midrange): All external debt is senior ranking and secured by assets on a pari passu basis. The use of mainly bullet maturities and rising pressure on lenders to halt funding to coal assets expose PON to refinancing risk. Lenders are protected by restrictive covenants. No debt service reserve account is required under the debt documents, but PON’s treasury policies require a reserve equivalent to six months of debt service and operating expenditure. We believe refinancing risk is mitigated by a staggered debt-maturity profile, diversified funding sources and investors.
PON has an ESG Relevance Score of ‘4’ for Management Strategy as its bullet amortisation debt structure compounds the risk of limited refinancing options. This is due to rising pressure on lenders to stop financing coal assets, as we have observed at other ports that focus on coal. This has a negative impact on the credit profile, and is relevant to the rating in conjunction with other factors.
PEER GROUP
The Port of Melbourne (PoM, Lonsdale Finance Pty Ltd, BBB/Stable) is the closest peer to PON. Both PoM and PON function as landlords for multiple ports, which reduces operational risk. PoM has a diverse throughput mix and export/import mix, while PON is significantly reliant on coal exports, which results in a ‘High-Midrange’ volume risk assessment as opposed to PoM’s ‘Stronger’ assessment.
PON also has a larger expansion plan to diversify its revenue base, leading to higher execution risk and financing pressure, which is reflected in the ‘Midrange’ assessment for infrastructure/renewal risk. PoM has a rating case five-year average net debt/EBITDA of 8.8x, slightly higher than PON’s 7.4x. However, the qualitative strengths of PoM on volume risk and infrastructure/renewal risk support a higher rating than PON.
We also compared PON to rated Australian coal terminals, including Newcastle Coal Infrastructure Group Pty Ltd (NCIG, senior secured rating: BBB-/Stable), Queensland-based Dalrymple Bay Finance Pty Ltd (senior secured rating: BBB-/Stable) and North Queensland Export Terminal Pty Ltd (NQXT, senior secured rating BB+/Negative), as all of these issuers have substantial exposure to the coal industry.
Compared with coal terminal operators, PON’s cargo is more diversified and it is in a stronger position in the supply chain with minimal competition. However, the three coal export terminals directly benefit from ship-or-pay contracts with users and full operating cost pass-through, which protect them from volume volatility and cost overruns, although PON can indirectly benefit from the ship-or-pay contracts of its coal terminal tenants, including NCIG.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to negative rating action/downgrade:
– Projected net debt/EBITDA above 8.5x for a sustained period, which could be a result of lower volume, deterioration in the credit profile of terminal operators that results in payment delinquencies, increased costs, failure to execute the diversification plan, additional indebtedness for distribution or adverse regulatory rulings; and/or
– Failure to complete debt refinancing well in advance of scheduled maturities.
Factors that could, individually or collectively, lead to positive rating action/upgrade:
We do not expect a rating upgrade in the medium term given the refinancing risk as well as the uncertainty around PON’s plan to reduce its reliance on coal
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. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.
TRANSACTION SUMMARY
PON is the largest port on Australia’s east coast and third-largest port in the country by tonnage. It operates the port under a 98-year concession with the New South Wales government that has around 92 years remaining. It has a total land of 777 hectares, with 388 hectares available for development.
CREDIT UPDATE
2021 normalised EBITDA exceeded Fitch’s expectations, with strong revenue and cost performance. Revenue in 2021 rose on record volume from the diversified trade segment, although this was partially offset by a slight reduction in property revenue due to lower wind-farm storage income. The increase in the port’s operating expense was driven by higher employee costs, which was partially offset by reduction in repair, maintenance, and other operating expenses. PON improved its normalised EBITDA margin to 63% in 2021 (2020: 62%).
FINANCIAL ANALYSIS
Fitch’s base case adopts PON’s coal throughput assumptions, which is a more conservative case than the base case of PON’s external consultant, Wood Mackenzie. Fitch’s rating case then assumes volume to be 5% lower than our base case, applies 5% stress on operating expenses and capital expenditure, and adds 200bp to interest rates.
The Fitch base case result in average net debt/EBITDA of 6.8x over the next five years. The rating case forecasts PON to deleverage over 2022-2026, with a five-year average of 7.4x. The financial profile is commensurate with a rating of ‘BBB-‘.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG CONSIDERATIONS
PON has an ESG Relevance Score of ‘4’ for Management Strategy as its bullet amortisation debt structure compounds the risk of limited refinancing options. This is due to rising pressure on lenders to stop financing coal assets, as we have observed at other ports that focus on coal. This has a negative impact on the credit profile, and is relevant to the rating in conjunction with other factors.
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of ‘3’. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch’s ESG Relevance Scores, visit www.fitchratings.com/esg
PARTICIPATION STATUS
The rated entity (and/or its agents) or, in the case of structured finance, one or more of the transaction parties participated in the rating process except that the following issuer(s), if any, did not participate in the rating process, or provide additional information, beyond the issuer’s available public disclosure.
Source: Fitch Ratings