RPT-Fitch Affirms THPA Finance's Notes; Outlook Stable
May 17 (Reuters) - (The following statement was released by the rating agency)
Fitch Ratings has affirmed THPA Finance Limited's (THPA) notes. The Rating Outlook on the notes remains Stable. A full list of rating actions is below.
The affirmation reflects Fitch's expectations that the return of steel-making to Teesside and a stabilisation of handled volumes at current levels coupled with tariff increases will provide support to the ratings and navigate the borrower further away from its default covenant.
THPA is a securitisation of the assets held, and earnings generated, by the PD Ports group, which owns the port of Tees & Hartlepool on the northeast coast of England. Teesport is the fifth-largest port in the UK per annual tonnage handled.
KEY RATING DRIVERS
The majority of Teesport's traffic is associated with production facilities from the steel, chemical and oil industries located in the vicinity of the port, although, management continues to diversify revenue sources by attracting new projects and customers to Teesside. Overall, traffic volumes have been falling in the past, mainly due to diminishing oil exports from the North Sea oil fields. Fitch expects the decline to moderate in the short term as oil throughput recovers following field outages and more raw materials are needed for the resumed steel production at Redcar steel plant.
Fitch continuously monitors the willingness of the owner of the steel plant, Sahaviriya Steel Industries UK Limited (SSI), to operate the plant in the longer term given its relatively higher associated operating costs and general dependence on importing raw materials. Currently, the agency takes comfort from SSI's significant financial commitment made when it acquired the plant, investments undertaken to lower production costs and the demand from automotive and white goods industries in Southeast Asia, where majority of the slab production is exported for further processing.
The PD Ports group employs a combination of a 'landlord' and 'operating' business model, thus maintaining some volatility related to operating risk from its business. Tariffs are unregulated and to a varying extent linked to inflation. Contracts with guaranteed revenue are mostly short-term and together with rental agreements represent approximately 20% of revenue.
The trailing 12 months (TTM) EBITDA as of end December 2012 was GBP36.1m and is slightly below Fitch's forecast of ?38.3m due to a slower ramp-up in production and export of steel slab than originally anticipated, cessation of car imports and lower Lo/Lo and Ro/Ro volumes due to general weak economic environment. Also lower extraction rates and outages in North Sea oil fields have negatively impacted the results. Nevertheless, the agency expects the transaction's TTM EBITDA to return to its run-rate range of GBP37-39m in the short to medium term.
All classes of notes are fully amortizing and benefit from a strong security package typical for UK whole business securitizations. There is no interest rate risk present. The transaction allows for more control by the senior noteholders if performance deteriorates and covenants are breached as a borrower event of default could lead Class A noteholders to enforce at the expense of junior notes. The liquidity facility is available only to Class A notes.
The transaction's reported EBITDA debt service coverage ratio (DSCR) stood at 1.31x as of end December 2012, ahead of its 1.25x default covenant at the borrower level. As anticipated by Fitch at last year's review, a reduction of the interest rate on the Class C notes to 10% p.a. from 18% p.a. in 2012 helped to avoid technical default under the transaction's documentation and created some headroom within the issuer-borrower structure. Given that all the Class C notes are owned by the securitisation sponsor, Fitch perceives that such reduction represents 'soft equity support' rather than distressed debt exchange.
Fitch's Base Case forecasts into the medium term are broadly in line with last year. The agency expects the EBITDA DSCR metrics to gradually return to above 1.30x for the Class C, 1.60x for the Class B and 2.10x for the Class A notes.
Fitch ran several sensitivities, including reduction in oil revenue by 30%, repeated mothballing of TCP or loss of another major customer. The most severe outcome would be if the Redcar steel plant is mothballed again. Under such a stress scenario which would likely result in downgrades across all classes of notes, the transaction would be technically in covenant default and debt service on the most junior class of the notes deferred.
Furthermore, the ratings will come under pressure if in the face of a continued challenging economic environment transaction's cash flow proves less resilient than Fitch would expect and EBITDA DSCR forecasts are consistently below 2.10x at Class A, 1.60x at Class B and 1.30x at Class C level over the medium term.
The rating actions are as follows:
GBP145m class A2 secured 7.127% fixed-rate notes due 2024: affirmed at 'A-'; Outlook Stable
GBP70m class B secured 8.241% fixed-rate notes due 2028: affirmed at 'BB+'; Outlook Stable
GBP30m class C secured 10.000% fixed-rate notes due 2031: affirmed at 'BB-'; Outlook Stable
Fitch's key rating factor attribute assessments for THPA are as follows:
Revenue - Volume: Mid-Range
Revenue - Price: Mid-Range
Infrastructure & Renewal: Stronger
Debt Structure: Class A: Stronger, Class B: Mid-Range Class C: Weaker Debt Service & Counterparty: Class A: Stronger, Class B: Mid-Range, Class C: Mid-Range
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