(Repeat for additional subscribers)
May 7 (The following statement was released by the rating agency)
Fitch Ratings has assigned Far-East Capital Limited S.A.'s USD500m 8% notes due 2018 and
USD300m 8.75% notes due 2020 a final senior unsecured rating of 'B+' with a Recovery Rating of
'RR4'. The notes are guaranteed by the majority of the operating subsidiaries of the Far-East
Shipping Company PLC (FESCO or the company; 'B+'/Stable). A list of FESCO's
ratings is at the end of this release.
The USD500m 8% senior secured notes due 2018 and the USD300m 8.75% notes due
2020, have been assigned a senior unsecured rating in line with FESCO's
Long-term foreign currency Issuer Default Rating (IDR) despite security provided
as part of the terms of the note agreements. This is due to the agency's
assessment of possible limitations realising collateral granted for the benefit
of the noteholders. Fitch's view of recovery upon default is reflected in the
'RR4' Recovery Rating.
FESCO's ratings reflect its position as one of the leading transportation and
logistics companies in Russia with a growing focus on its port operations in the
Russian Far East and niche market positions in rail. However, despite some
diversification, FESCO is likely to remain subject to volume and pricing
volatility, and in a sector of increased market consolidation, its rail business
potentially faces greater competition from its larger rail transportation peers.
Despite forecast improvement, credit metrics are also considered weak with FFO
net adjusted leverage expected to be in excess of 3.0x and FFO fixed charge
cover of around 2.5x in the short term.
KEY RATING DRIVERS
- Port Key to Business Profile
In March 2012, FESCO obtained full operational control over the Commercial Port
of Vladivostok, one of the largest ports in the Russian Far East, albeit small
relative to global peers. Combined with the disposal of a large proportion of
the company's loss-making shipping business in December 2012, this favourably
increases the company's exposure to higher-growth, higher-margined businesses.
Whilst not immune to cyclicality, the port benefits from around 50% of origin
and destination volumes, which tend to be less subject to competition given the
proximity to the point of consumption and distribution. Growth and margins in
the port division should further benefit from increased integration between
various stevedoring companies and terminals within the Commercial Port of
Vladivostok. Until now these have operated as separate legal entities, often
competing with each other.
- Vladivostok a Gateway to Asia
Vladivostok port is geographically key in the importing of consumer goods and
exporting of commodities between Russia and Asia with a population of
approximately 400 million within a 1,000km radius. FESCO's market shares in the
Russian Far East region included 35% of all container handling and 15% of all
bulk cargos. Whilst the port is not dominant relative to other ports in the Far
East Basin, the Port of Vladivostok serves a large proportion of regional
domestic markets, given its more developed rail networks, convenient access to
the Trans-Siberian Railway and regularly-scheduled cabotage lines.
- Intermodal and Niche Rail Operations
FESCO is one of the few Russian transportation companies to have a full presence
across the entire logistics chain, a key differentiator to peers. Whilst peers
are also intensifying their focus in this respect, they tend to lack a presence
in either port or shipping operations, which puts them at a competitive
disadvantage. FESCO is one of the top 10 private railcar operators in Russia by
number of railcars, with a market share of more than 40% in the Yakutia region,
an area accounting for approximately 50% of Russia's total coal reserves. In
addition, FESCO operates one of the largest fleet in the Ukraine.
- GDP to Drive Growth
FESCO's growth is expected to be driven by continued moderate to high GDP growth
rates in both Russia and Asia, as well as the continuing trend towards further
containerisation of cargo flows. Railroads are also expected to remain the main
method of cargo transportation. Fitch forecasts that Russia and China's GDP
should continue to grow at around 3.2% and 8.0%, respectively in FY13, and these
levels should ensure relatively strong demand for Russian commodities and
exports in the near term as well as the imports of consumer and industrial goods
to the Russian Far East. The growth of rail freight turnover has on average
tended to be around 1% below that of real GDP since 2002, whilst the Russian
container market has witnessed growth of around 3x GDP since the 2009 crisis due
to Russia's relatively low containerisation levels.
- Cyclicality Remains a Risk
Whilst GDP growth is forecast to continue in the medium term, the volatility of
FESCO's earnings remains a key risk. Towards the end of 2012, growth in Russian
container volumes slowed. Rail tariffs are also expected to be weaker relative
to the higher levels in FY12. Fitch emphasises that further deceleration of the
global economy could translate into tangibly reduced railway transportation and
container throughput volumes at the Port of Vladivostok.
- Diversified but Commodity Exposure
FESCO is relatively well-diversified in terms of cargo types, facilitated by its
balanced and flexible fleet portfolio. However, in common with some of its rail
peers, commoditised goods including coal, iron ore and construction materials
dominate its rail division, comprising around 77% of total transported rail
volumes. FESCO's port and liner and logistics divisions provide the group with
greater exposure to higher-value goods and geographical diversity. Trade flows
in terms of container throughput are relatively well-balanced, although bulk
cargo is skewed towards exports, given Asia's demand for raw materials.
- Moderate Customer Diversification
Although FESCO's customer base is relatively broad (around 1,500 customers
spanning a variety of industries and of relatively good quality) it exhibits
greater concentration relative to peers, particularly in the rail division where
the five largest direct clients accounted for around 38% of the division's
- Rail Market Consolidation a Threat
Fitch expects competition in the rail sector to intensify due to further market
consolidation in the coming years as economies of scale become more important
and expansion demands greater capital expenditure. Relative to its rail peers,
FESCO has a smaller fleet, limited rail container terminals and given its niche
focus, its rail network is also less extensive. With greater competition this
may erode FESCO's rail market shares and margins in its bulk and general cargo
operations. Its current stake in TransContainer is a partial mitigant to this.
- Potential Competition to Vladivostok Port
Growth in the trade flows between Russia and Asia is expected to lead to
increased capacity in the region, including significant expansion by Vostochnaya
Stevedoring Company (VSC), Vladivostok's main competitor with 30% of regional
container volumes. Vladivostok's own market share in terms of container traffic
flows decreased to 34.6% in FY12 from 39.2% in FY10, and VSC's plans to
quadruple capacity to TEU2.2bn compared with Vladivostok's intentions to
increase capacity to 650,000 TEU may place further pressure on this. However,
unlike Vladivostok, VSC's volumes are primarily focused on serving international
cargo flows, with the majority of its import volumes transported to the central
and western regions of Russia, including Moscow, a less captive market for
- Credit Metrics Major Rating Constraint
Net FFO adjusted leverage and FFO fixed charge cover are currently considered
weak. In FY13, leverage is forecast to be around 4.2x and FFO fixed charge cover
is expected to be around 2.0x, considerably weaker than rail transportation
peers. However, the agency recognises the marginally stronger business profile
of the port business and due to strong forecasted cash flows, expects these
metrics to strengthen to more commensurate levels of around 3.5x leverage and
around 2.5x FFO fixed charge cover by FY14. Cash flows are contingent on
continued high growth rates, substantial cost-efficiencies, particularly in the
port division, and moderate capex levels.
Management has confirmed its intention to delever to below 2.5x net debt/EBITDA
over the next 18 months and does not intend to distribute dividends in the
medium term. FESCO has been historically acquisitive but has used disposal
proceeds to partially fund these.
- Senior Secured Notes Rated as Unsecured
The senior secured notes have been assigned a senior unsecured rating in line
with company's IDR despite security provided as part of the terms of the note
agreements. This is due to the agency's assessment of possible limitations
realising collateral in Russia granted for the benefit of the noteholders.
The senior secured notes rank pari passu to all existing and future secured
debt, benefit from cross-default provisions (within a threshold set at USD30m)
and be guaranteed by the majority of the company's operating companies. The
Commercial Port of Vladivostok is expected to accede as a guarantor shortly
after the issuance of the bonds.
Security comprises an expected USD560m of hard asset security including
railcars, buildings and containers (exact constituents of the hard asset
security package to be defined within 180 days of bond issue date) as well as
share pledges over various holdings in the group including the company's main
operating subsidiaries. Fitch highlights that debt issued at entities that do
not act as guarantors are structurally senior to the notes. Structurally senior
debt is expected to total USD69m but has been taken into consideration in
Fitch's recovery analysis.
LIQUIDITY & DEBT STRUCTURE
- Adequate Liquidity
Short-term maturities as at FY12 amounted to USD219m. Of this amount, up to
USD120m of debt will be funded by the proposed bond issuances, ensuring that the
remaining USD99m will be more than sufficiently covered by FY12 cash and cash
equivalents of USD232m. FESCO is expected to have undrawn committed credit
facilities of approximately USD10m, albeit USD8.4m is forecast to expire in
- Covenant Headroom under OpCo Loan
Headroom in the cash flow cover covenant under the acquisition-related OpCo Loan
in FY15 and FY16 is tight. This is given continually high interest payments and
a tightening in the cash flow covenant to exclude cash and cash equivalents.
Adherence to this covenant will be dependent on the company's ability to
generate strong cash flows and delever ensuring interest payments are kept to a
minimum. Fitch considers headroom under the net debt/ EBITDA and interest cover
financial covenants to be sizeable.
Financial covenants per the acquisition-related OpCo Loan restrict dividend
payments until the company delevers to 2.5x net debt/EBITDA. This provides
noteholders with some comfort over the company's intention to delever, although
Fitch emphasises that the acquisition-related OpCo Loan matures in December 2017
before the maturities of the notes, and FESCO has the option to repay the
acquisition-related OpCo Loan early. Amendments have already been made to the
cash flow covenant to ensure this was not breached in FY13 and FY14.
Positive: Future developments that could lead to positive rating actions
- A sustainable improvement in FFO net adjusted leverage to below 3.0x and FFO
fixed charge cover trending towards 3.0x.
Negative: Future developments that could lead to negative rating action include:
- A deterioration in FFO net adjusted leverage to around 4.0x and FFO fixed
charge cover consistently below 2.0x given lower than expected growth and/or
efficiency-savings in the port division and/or material debt-funded acquisitions
- Signs of increased competition or greater volatility of earnings in the port
and/or rail business.
FESCO's ratings are as follows:
Long-term foreign currency IDR of 'B+'/Stable
Long-term local currency IDR of 'B+'/Stable
National Long-Term Rating of 'A(rus)'/Stable
Foreign currency senior unsecured rating of 'B+'
Local currency senior unsecured rating of 'B+'