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Fitch Assigns Port of Newcastle’s USD300m Notes Final Rating of ‘BBB-‘/Stable

Thursday, 25 November 2021 | 01:00

Fitch Ratings has assigned Port of Newcastle Investments (Financing) Pty Ltd’s (PoN FinCo) USD300 million of senior secured notes a final rating of ‘BBB-‘. The Outlook is Stable.

RATING RATIONALE
The US-dollar notes will be senior secured obligations of PoN FinCo and will rank pari passu with any other senior secured indebtedness of PoN FinCo. The notes feature a 10-year bullet amortisation and fixed interest rates. The net proceeds will be used to refinance part of existing senior secured loan facilities maturing in July 2023.

The rating reflects the consolidated profile of the Port of Newcastle group, including the financing vehicle PoN FinCo and the rest of the PoN group entities that are providing a full, irrevocable and unconditional guarantee to external lenders, including the US-dollar noteholders. The rating 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 these come with uncertainty as to whether they 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.

PoN is likely to deleverage over 2021-2025, with net debt/EBITDA in Fitch’s rating case for the period dropping from a peak of 9.0x in 2022 to 7.1x in 2025, with a five-year average of 8.2x. The financial profile is commensurate with a rating of ‘BBB-‘.

KEY RATING DRIVERS
Gateway to Coal Export Markets – Revenue Risk (Volume): Midrange

PoN is the only export port with efficient infrastructure and established connectivity that serves the Hunter Valley mining region in Australia. Exports of thermal and metallurgical coal account for 80% and 16% of PoN’s volume, respectively. The exposure to commodity markets is mitigated by the stable coal supply that is underpinned by 10-year evergreen marketable reserve requirements at its two coal terminals. PoN’s volume is also supported by increasing demand for high-quality coal from Asia. The fall in China’s purchases of Australian coal since December 2020 has not had a significant impact on PoN, as it has largely replaced the lost volumes by increased shipments to India and south-east Asia.

Long-Term Contracts – Revenue Risk (Price): Stronger

PoN benefits from the landlord operation model, under which 76% of its revenue is contracted under long-term, fixed-price agreements. Around half of PoN’s revenue is from navigation service charges under 10-year bilateral agreements with coal vessel agents (on behalf of vessel operators), and another 26% of revenue is from income under lease agreements that have a remaining weighted-average life of 16 years.

The majority of leases are inflation-linked, while the navigation service charges under the bilateral agreements generally increase at the greater of inflation or 4%. PoN has discretion and ability to modify the level of charges other than under the bilateral agreements for the navigation service charge in respect of coal vessels.

Extensive but Flexible Capex Plan – Infrastructure Development and Renewal: Midrange

PoN has an extensive capital investment programme with a focus on diversifying revenue away from coal. The plan includes over AUD250 million of projects in 2021-2025, and another AUD250 million of projects in 2026-2031. PoN’s liquidity and funding policies prioritise preservation of free cash flow over distribution to avoid over-reliance on debt to fund expansion projects. 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 in ranking and secured by all assets on a pari passu basis. The use of mainly bullet maturities as well as rising pressure on lenders to halt funding to coal assets expose PoN to refinancing risk. The noteholders will indirectly benefit from relatively restrictive covenants under the existing syndicated facility agreement, although these covenants are not part of the terms and conditions of the bond indenture. The currency-risk exposure is managed by a minimum five-year hedging instrument on a rolling basis, while interest-rate risk is limited to a maximum of 50% for a minimum of two years. No debt service reserve account is required under debt documents, but this is mitigated by the company’s treasury policies, which require a reserve equivalent to six months of debt service and operating expenditure.

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 berths, 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 ‘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 8.5x, slightly higher than PoN’s 8.2x. 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 diversification 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.

TRANSACTION SUMMARY
The USD300 million of senior secured notes are issued by PoN FinCo and guaranteed by the rest of the PoN group entities. The issuing entity together with the guarantors are considered as the obligor group. The net proceeds of the US dollar notes will be used to partially refinance existing senior secured loan facilities maturing in July 2023.

The guarantors include:

– Port of Newcastle Investments Pty Limited,

– Port of Newcastle Investments (Holdings) Pty Limited (in its own capacity and as trustee of the Port of Newcastle Investments (Holdings) Trust),

– Port of Newcastle Investments (Property Holdings) Pty Limited,

– Perpetual Corporate Trust Limited in its capacity as trustee of the Port of Newcastle Investments (Property Holdings) Trust,

– Port of Newcastle Investments (Property) Pty Limited (in its own capacity and as trustee of the Port of Newcastle Investments (Property) Trust), and

– Port of Newcastle Operations Pty Limited (in its own capacity and as trustee of the Port of Newcastle Unit Trust).

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
Port of Newcastle Investments (Financing) Pty Ltd has an ESG Relevance Score of ‘4’ for Management Strategy due to the risk of limited refinancing options, which has a negative impact on the credit profile, and is relevant to the ratings 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.
Source: Fitch Ratings

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