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.
KEY RATING DRIVERS
The rating reflects MGT’s role as one of two terminal operators serving the Port of Montreal (POM), the primary gateway port for Eastern and Central Canada; MGT benefits from POM’s strategic location on the Saint Lawrence Seaway, albeit with some exposure to competition from Termont Montreal Inc., the other terminal operator at POM. MGT’s lack of long-term contracts with shipping lines is mitigated somewhat by the long operating history of the existing shipping customers at the port, coupled with the lack of cost-effective alternative access points for serving the Quebec and Ontario markets.
While MGT has faced volume pressures over the past year due to a combination of coronavirus pandemic and protracted labour disputes in 2021, its rating reflects strength afforded by the diversified shipping lines serving its two container terminals. This franchise strength is coupled with MGT’s flexible cost structure, which allows it to adjust variable costs in line with declines in shipping volumes, and has allowed maintenance of strong EBITDA margins through the pandemic. Leverage remains modest compared with peers, but the bullet maturity introduces some refinancing risk to the debt structure, limiting the rating.
Strong Position; Strategic Port: (Revenue Risk — Volume: Midrange)
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 being handled primarily by U.S. East Coast ports.
Volumes through the POM are high at 1.6 million 20-foot equivalent units (TEUs) and 1.7 million TEUs in 2020 and 2021, respectively. MGT’s franchise strength within the port is strong, handling nearly 820,000 TEUs in 2021, giving it 48% of market share at POM. MGT’s facilities are well utilized but not constrained.
Established Customers, Limited Contracts: (Revenue Risk — Price: Midrange)
MGT’s contracts with shipping lines are generally short in duration, averaging three to five years; contracted price escalation is matched to labor and CPI increases. The lack of minimum volume guarantees with shippers exposes revenues to potential volatility. However, Fitch believes MGT’s long-term relationships with customers make it likely that shipping lines will renew their agreements (Hapag-Lloyd, OOCL, Maersk, CMA-CGM).
Termont only handles Mediterranean Shipping Company’s (MSC) volumes. One Maersk service was discontinued in mid-2020, but much of the service’s volumes were picked up by Hapag-Lloyd charter service calling at MGT. Labour strikes in 2021 also resulted in a portion of Hapag Lloyd’s volumes being rerouted to Halifax, though management anticipates this volume will return to MGT in 2022.
Modest Capex Requirements: (Infrastructure and Renewal Risk: Stronger)
The current MGT capex projections through 2030 are modest, calling for total investment of CAD116 million to refurbish existing equipment or purchase replacement equipment. These improvements, including the purchase of new rubber tire gantries (RTGs) and new ship-to-shore cranes (STS), position MGT to more efficiently handle the largest vessels calling at its facilities. MGT is lease financing for its new equipment purchases, while all maintenance capex is financed through operational cashflows.
Fixed-Rate Bullet Debt: (Debt Structure: Midrange)
The acquisition of MGT by a consortium led by Axium Infrastructure Inc., which closed March 2015, was financed with a five-year term loan. This loan was refinanced in 2016, with 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, although MGT hedged the interest rate. 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 2019 to 2021 period, reflecting the variable nature of the majority of the costs despite ongoing revenue pressures. Liquidity is low compared to peers, but is considered adequate together with the six-month DSRA LC.
In Fitch’s rating case, TEU growth averages 0.9% (CAGR for 2019 through 2030). Senior P&I debt service coverage ratio (DSCR) averages 2.2x through 2030, which compares favourably to peers. Total debt/EBITDA rises to 5.3x in 2022, but falls to a modest 3.8x by 2027, consistent with the rating level.
PEER GROUP
Relevant Fitch-rated peers include Alabama Port Authority (BBB+/Stable Outlook) in the U.S. and DP World Limited (BBB-/Stable Outlook) 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 high and leverage is modest compared with peers, the bullet debt introduces some refinancing risk to the debt structure, limiting 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, or additional medium-term borrowing, which lead to an increase in debt/EBITDA above 6.0x on a sustained basis;
–Ongoing labor disruptions leading to volume shifts away from Canadian ports, constraining revenues and margins;
–Longer term, competitive pressure from other terminals, leading to volume shifts away from MGT’s Island of Montreal facilities, leading to constrained revenues and margins.
Factors that could, individually or collectively, lead to positive rating action/upgrade:
–Revenue growth and maintenance of operating margins resulting in total debt/EBITDA maintained below 4.0x on a sustained basis.
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.
CREDIT UPDATE
After several years of strong volume and revenue performance in the pre-pandemic period, MGT saw volume decreases in 2020 and 2021, reflecting a combination of labour strikes and disruptions related to the coronavirus pandemic. TEU volumes decreased by 13.5% and 3% in 2020 and 2021 respectively, finishing 2021 at 820,000 TEUs.
Labour disruptions in the second half of 2021 led shipper Hapag Lloyd to reroute a portion of its volumes through Halifax; given operations through POM are comparatively more cost efficient under normal operating conditions, MGT indicates they expect this to be a temporary shift. MGT is budgeting for volumes to increase nearly 9% in 2022 relative to 2021, and forecasts volumes to surpass 2019 levels in 2023.
MGT’s operating revenues fell nearly 9% in 2020 relative to 2019, reflecting negative volume effects of the coronavirus pandemic coupled with operating slowdowns from ongoing labour disruptions. By contrast, MGT’s 2021 revenues increased by 5% even as volumes decreased. This improvement reflects MGT’s realization of higher ancillary revenue from storage and demurrage fees during the period, incurred due to the labour-related operating slowdowns.
MGT’s costs have historically been flexible, adjusting relative to volumes through business cycles and providing for resilient operating margins. Costs have continued to be well managed through the pandemic period, with management successfully adjusting costs downwards through the volatile periods of 2020 and 2021. Fixed costs represent roughly 40% of MGT’s total operating costs (primarily port rent, administration costs, insurance, and equipment leases) and move with inflation.
Variable costs, dominated by labour costs, are closely tied to volumes, and account for the remaining 60%. Fitch notes margins have remained relatively stable in the range of 34-36% from 2019 to 2021, despite the effects of the coronavirus pandemic, labour disruptions and rail blockades during this timeframe. This margin stability illustrates the resiliency of MGT’s cashflows even during periods of volume stress.
Labour disruptions have negatively affected MGT’s operations in both 2020 and 2021, exacerbating volume pressures from the coronavirus. After rail disruptions and work stoppages in 2020, a truce was reached between the Canadian Union of Public Employees (CUPE) and Maritime Employers Association with a pledge to forego further labor stoppages for seven months while the two sides resumed contract talks. This truce period expired with no new agreement in place in April 2021, leading to a strike that resulted in a volume loss of approximately 25,000 TEUs.
The federal government approved legislation in April 2021 to provide for resumption and continuation of operations at POM, while imposing a mediation process for resolving matters in dispute between the parties. The legislation also empowered the mediator-arbitrator to impose arbitration as the process for resolving matters that cannot be resolved through mediation.
The parties had their first hearings in October 2021, with subsequent hearing dates scheduled through January 2022. MGT management indicates that arbitration, once concluded, will lead to a new agreement between parties, mitigating the risk of additional strikes in the medium term.
MGT’s capital program for 2021 through 2030 is modest at CAD116 million and consists of investments to either refurbish existing equipment or purchase replacement equipment, improving MGT’s cargo handling efficiency or reducing operating costs. Replacements consist largely of purchasing new RTGs and new STS cranes, with expenditures expected to average CAD10 million per year. MGT received two new STS cranes in mid-2021, with the cranes coming online by YE; two additional STS cranes will be installed in 2022, for a total of four new cranes.
While the terminal saw some disruption to operations during the installation of the first two cranes, Fitch notes that much of the civil work for the two remaining cranes was completed together with the preparatory work for the initial cranes, so the 2022 installation is expected to be comparatively less disruptive to operations. The new cranes will increase MGT’s loading/unloading capacity and enable full servicing of the largest vessels expected to call at POM in the future.
FINANCIAL ANALYSIS
Fitch’s base case adopts management projections through 2030, assuming a TEU growth CAGR of 1.7% through 2030, while container handling revenues grow at a CAGR of 4.1% over the same period. TEU volumes, which were impacted by the coronavirus pandemic and labour disruptions in the 2020 and 2021 period, are assumed to revert to pre-pandemic 2019 levels by 2023, growing thereafter at 2.5% annually through 2030.
Operating expenses grow at a CAGR of approximately 4.1% during the same period. From 2031 through 2041, TEUs grow at a CAGR of 1.5% per year, while container handling revenues grow at a CAGR of 3.5%. Operating expenses grow at approximately 3.8% per year. Under this scenario, senior DSCR (P&I) averages 2.5x through 2030 and 3.3x through the projection period (minimum of 1.7x). Total debt/EBITDA reaches a maximum of 5.3x, falling to 3.5x by 2027 (year 5 of forecast period).
Fitch’s rating case assumes comparatively lower volume growth, with TEU’s growing at a CAGR of 0.9% through 2030, while the container handling revenues grow at an average of 3.2%. Volumes are still assumed to revert to 2019 levels by 2023 in this scenario, but grow at a lower rate of 1.2% thereafter. Operating expenses grow at a CAGR of 3.5% over the same period. From 2031 through 2041, TEUs grow at a CAGR of 1.2%, while container handling revenues grow at CAGR of 3.2%.
Operating expenses grow at approximately 3.7% per year. Under the rating case, senior DSCR (P&I) remains strong, averaging 2.2x through 2030 and 2.5x through the projection period (minimum of 1.7x), while total debt/EBITDA reaches a maximum of 5.3x in 2022, but falls to a modest 3.8x by 2027, consistent with the rating level.
Source: Fitch Ratings