Fitch Ratings has affirmed the FA MGT Limited Partnership’s (MGT) CAD305 million 2016 guaranteed senior secured notes at ‘BBB’. The Rating Outlook is Stable.

RATING RATIONALE
The rating reflects MGT’s role as one of two terminal operators serving diversified shipping lines at the Port of Montreal (POM), the primary gateway port for Eastern and Central Canada albeit with some exposure to competition and labor issues. MGT’s lack of long-term contracts with shipping lines is somewhat mitigated by the long operating history of the existing shipping customers at the port, coupled with the lack of cost-effective alternatives for serving the Quebec and Ontario markets.

MGT has experienced high volume volatility in the recent years due to labor supply uncertainty at the POM and the global supply chain disruption during the pandemic. Despite this, MGT’s financial profile has not been adversely impacted, supported by a flexible cost structure that allows variable costs to adjust with volume activity and normalization of ancillary revenues at higher levels since the pandemic. While this has led to steady EBITDA margins and modest leverage relative to peers, the bullet maturity in 2026 presents refinancing risk to the debt structure, which constrains the rating. Fitch will continue to monitor progress on refinancing.

KEY RATING DRIVERS
Revenue Risk – Volume – High Midrange

Strong Position; Strategic Port: MGT is one of only two container operators at POM, operating two of the port’s four international container terminals. Montreal is the primary port of call for Canada’s largest markets: Quebec and Ontario. Service levels are somewhat limited to eastern Canada, with discretionary U.S. Midwest traffic handled primarily by U.S. East Coast ports. MGT’s franchise strength within the port is strong, handling approximately 785,000 TEUs in 2024, giving it slightly over 50% of market share at POM. The facilities are well utilized but not constrained.

Revenue Risk – Price – Midrange

Established Customers, Limited Contracts: MGT’s contracts with shipping lines are generally short-to-intermediate in duration, averaging three to five years. The lack of substantial minimum volume guarantees with shippers exposes revenues to potential volatility; however, contracted price escalation is matched to labor and CPI increases. Fitch believes MGT’s long-term relationships with customers (Hapag-Lloyd, OOCL, Maersk, CMA-CGM) make it likely that shipping lines will continue to renew their agreements.

Infrastructure Dev. & Renewal – Stronger

Modest Capex Requirements: The current MGT capex projections through 2030 are modest. Maintenance capex is typically financed through operational cash flows, despite recent use of lease financing for its new equipment purchases, such as new rubber tire gantries (RTGs) and new ship-to-shore cranes (STS) that position MGT to more efficiently handle the largest vessels calling at its facilities.

Debt Structure – 1 – Midrange

Fixed-Rate Bullet Debt: Debt consists of a CAD305 million bullet private placement fixed-rate bond maturing in 2026. The bullet structure of the debt potentially exposes the operator to refinancing risk. In place of a cash funded debt service reserve account (DSRA), there is a standby LOC equivalent to six months of debt service (interest only).

Financial Profile
MGT benefits from relatively steady operating margins, ranging between 34%-36% during the 2019 to 2024 period, reflecting the variable nature of the majority of the costs despite ongoing revenue pressures. The margins were significantly higher at 45% in 2022 due to high ancillary revenue, but returned to normalized levels of 35% in 2023. Liquidity is low compared to peers, but is considered adequate together with the six-month DSRA LC.

Despite an expected economic slowdown in Canada, the Fitch rating case assumes volumes growing at a modest pace given our expectation of operations returning to normal following the end of labor strikes in late 2024. However, amid actual volume performance and volatility since the pandemic, our assumed TEU recovery to 2019 levels has been pushed out to 2033 (2031 previously). Under Fitch’s rating case assumptions senior debt service coverage ratio averages 2.2x from 2025 to 2030. Total debt/EBITDA is consistent with the rating level, falling to a modest 4.5x by 2026 which is the year the rated notes mature. Fitch’s cases were run with a 7% interest rate and incorporate synthetic amortization of the note assuming 25-year amortization.

PEER GROUP
Relevant Fitch-rated peers include Alabama Port Authority (BBB+/Positive) in the U.S. and DP World Limited (BBB+/Stable) in Dubai, United Arab Emirates. Alabama is a full port, compared with DP World, which is a global terminal operator. While MGT’s coverage remains broadly in line with peers, leverage is slightly weaker than peers. Further, the bullet debt introduces some refinancing risk to the debt structure, which constrains the rating.

RATING SENSITIVITIES
Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade
–A continued period of material throughput reduction leading to declines in revenue and operating margins, which results in an increase in debt/EBITDA above 6.0x on a sustained basis with continued exposure to refinancing risk post 2026, and debt/EBITDA above 8.0x on a sustained basis if there is no exposure to refinancing risk post-2026;

–Labor disruptions leading to volume shifts away from Canadian ports, constraining revenues and margins;

–Delay in refinancing of the rated debt;

–Longer term, competitive pressure from other terminals, leading to volume shifts away from MGT’s Island of Montreal facilities that constrain revenues and margins.

Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade
–Maintenance of total debt/EBITDA below 4.0x on a sustained basis if the project remains exposed to refinancing risk post 2026. This compares to total debt/EBITDA of 4.5x in 2026 under the Fitch rating case;

–If refinance risk exposure is eliminated post 2026, maintenance of total debt/EBITDA below 6.0x on a sustained basis.

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
FA MGT Limited Partnership has an ESG Relevance Score of ‘4’ for Labor Relations & Practices due to impacts of labor relations between the Maritime Employers Association and CUPE during periods of contract negotiations, which may potentially have a negative impact on the credit profile and is relevant to the rating in conjunction with other factors.
Source: Fitch Ratings