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 below.

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. This is underpinned by its competitive strength in the coal supply chain. The rating also reflects PON’s high concentration of trade in a single commodity, thermal coal, although it benefits from substantial contracted revenue and stable income from property leases.

Fitch expects increasing demand for high-quality coal from south-east Asia to support PON’s export volume in the short to medium term. However, PON will face rising environmental, social and governance (ESG) concerns in the longer term over its heavy reliance on coal.

This risk could ease, as PON has started implementing an extensive expansion plan to diversify revenue streams away from coal and has a contractual target leverage under the cash sweep mechanism of 6.5x net debt/EBITDA. We believe that PON’s contracted annual price increase, the mandatory cash sweep provision and management’s commitment to maintain an investment-grade rating provide downside protection for bondholders until the US dollar notes mature.

For mid- to long-term diversification, Fitch recognises that PON will benefit from growth in the service region, the existing deepwater harbour, available land and intermodal links that support its expansion plan. Even so, uncertainty remains on whether it could significantly reduce its reliance on coal.

Fitch’s rating case on net debt/EBITDA between 2023-2027 indicates the group will deleverage to 5.9x in 2027, from 8.2x in 2023, with a five-year average of 7.0x. The financial profile is commensurate with a ‘BBB-‘ rating. The projected improvement in PON’s leverage metric is driven by successful price increases in 2023, prioritising debt reduction over the next three years and expected recovery in coal throughput volume from 2022 level.

KEY RATING DRIVERS

Gateway to Coal Export Markets – Revenue Risk (Volume): High-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.

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

PON benefits from the landlord operation model, under which 77% of revenue is contracted under long-term, fixed-price agreements. About 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 quarter of revenue is from income under lease agreements with a remaining weighted-average life of 14 years. The majority of leases are inflation-linked, while the navigation service charges generally increase at the greater of inflation or 4%.

PON can modify the level of charges other than under the bilateral agreements for the navigation service charge in respect of coal vessels. PON increased its coal navigation service charge by CPI (7.3%) in 2022 and other charges by CPI +1% (8.3%) for 2023.

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

PON has an extensive capital investment programme to diversify revenue away from coal. The plan includes around AUD190 million of growth capex in 2023-2027. Liquidity and funding policies prioritise preservation of free cash flow over distribution to avoid overreliance on debt to fund expansion projects. It has no material contractual obligations and has high flexibility to defer expansion. Still, the assessment is limited to ‘Midrange’, as PON is under pressure to reduce 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 successfully demonstrated access to domestic banking markets through refinancing its 2023 term debt out to 2026 and 2027, maintaining relationships with three of the four major domestic banks and Citi, despite a few foreign banks opting not to participate in the syndicate in November 2022. Chinese banks stepped in to fill the gap. PON believes one of its parent entities, which is ultimately owned by a Chinese state-owned entity – supported continued access to Chinese banks.
Financial Profile

Fitch’s base case adopts PON’s coal throughput assumption, excluding BHP Group Limited’s (A/Stable) Mt Arthur mine from 2031 (BHP plans to close the mine in 2030), and applies a 5% haircut on diversified trade volume, operating expenditure and capex, and applies a 1% premium to forecast borrowing costs. This results in average net debt/EBITDA of 6.5x over the next five years amid higher EBITDA, even while the debt balance rises on the non-amortising debt structure along with debt funding of growth capex over time.

Fitch’s rating case, which tempers volume growth, increases operating costs and applies a 2% premium to forecast borrowing costs, resulting in an average net debt/EBITDA of 7.0x over the next five years.

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 has a larger expansion plan to diversify revenue, leading to higher execution risk and financing pressure and reflecting the ‘Midrange’ assessment for infrastructure and renewal risk. PoM has a rating case five-year average net debt/EBITDA of 8.4x, slightly higher than PON’s 6.5x. Still, the qualitative strengths of PoM on volume risk and infrastructure and 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-/Positive), Queensland-based Dalrymple Bay Finance Pty Ltd (senior secured rating: BBB-/Stable) and North Queensland Export Terminal Pty Ltd (NQXT, senior secured rating BB+/Stable), as all of these issuers have substantial exposure to the coal industry.

PON’s cargo is more diversified than coal terminal operators’, 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. Even so, 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 debt for distribution or adverse regulatory rulings;

– 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.

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

Trade revenue decreased by 6.7% in 2022, due mainly to diminished volumes in the coal business on weather disruption throughout the supply chain. This drop was offset by a 3.2% increase in property revenue, a rise driven by CPI adjustments and fixed percentage increases in the underlying lease book. Still, total revenue decreased by 4.3% (AUD7.5 million) in 2022. EBITDA also decreased by 4.5% (AUD4.4 million), though the EBITDA margin remained consistent with no significant fluctuation.

PON completed refinancing of AUD340 million of its July 2023 term debt facilities and AUD80 million of revolvers in November 2022. Three AUD7.5 million cash sweep payments were also made, with an additional voluntary prepayment made in December 2022, resulting in a total debt repayment of AUD30 million.

There was continued restraint in distribution in 2022, including interest on high-yield notes. Only tax-related payments were distributed to shareholders, indicating a conservative approach to cash management during this period.

From January to April 2023, revenue was higher than the same period last year, due mainly to higher diversified trade throughput and changes in the trade mix. PON raised coal charges on 1 January 2023, based on the CPI, and increased most other maritime charges by CPI +1%. These price increases, along with higher CPI, favourably affected the property portfolio. Operating costs remained in line with the previous year, and EBITDA rose by 5% despite lower coal throughput due to heavy wind and rough seas.

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.
Source: Fitch Ratings