-- Ultrapetrol (Bahamas) Ltd. recently announced an agreement with Southern Cross Group that may result in a $220 million capital injection in the company.
-- We are placing our 'B-' issuer credit rating on Ultrapetrol on CreditWatch with developing implications. -- We will resolve the CreditWatch placement as the uncertainties regarding the transaction's closing dissipate and, if the transaction closes, when we have more information regarding the agreement's impact on the company's stakeholders.
On Dec. 3, 2012, Standard & Poor's Rating Services placed its 'B-' issuer credit rating on South American shipping company Ultrapetrol (Bahamas) Ltd. on CreditWatch with developing implications.
Our rating on Ultrapetrol reflects the company's "weak" (as our criteria define the term) business risk profile and "highly leveraged" financial risk profile. Ultrapetrol's business risk profile reflects its river-based business' exposure to climate conditions, which may affect the amount of cargo transported (mainly soybeans) and the navigability of the upper side of the river system. The company is also highly leveraged--more so in 2012 because of weak cash flows due to climate conditions. Partially offsetting these factors is the increased revenues from the company's offshore services business, which present more stable cash flows due to the long-term contracts with Petroleo Brasileiro S.A. - Petrobras (BBB/Stable/--), despite the required significant capital expenditures. Ultrapetrol announced on Nov. 13, 2012, that it has reached an agreement with an investment vehicle that is ultimately managed by private equity fund Southern Cross Group (not rated). Under the deal, Ultrapetrol will issue additional 110 million shares, for which Southern Cross would pay $2 per share, effectively injecting $220 million into Ultrapetrol. The agreement is subject to certain closing conditions, including but not limited to a waiver by holders of certain repurchase rights related to Ultrapetrol's convertible senior notes due 2017. Although we view the transaction, if closed, as positive for Ultrapetrol's financial profile, we also believe that the positive implications to the rating depend on the effective improvement of the company's liquidity and overall capital structure and the agreement's impact on the company's several stakeholders, including the existing noteholders. We will closely monitor those factors as the negotiations unfold. The long-lasting drought in western Brazil, Paraguay, and part of Argentina has significantly affected Ultrapetrol's river business this year. The drought has resulted in reduced production in the affected regions and, therefore, less demand for Ultrapetrol, as well as reduced navigability of the Paraguay River. Cost increases and adverse foreign exchange rates have also put additional pressure on Ultrapetrol's operating figures, leading to further deterioration of the company's EBITDA margins, which dropped to 14.6% in the 12 months ended September 2012, compared with 18.9% in the same period in 2011. Ultrapetrol's financial risk profile is highly leveraged, but somewhat stable. The company's debt totaled about $527 million as of September 2012, compared with $512 million from a year earlier. However, during that period, total debt to EBITDA declined to 11.2x from 10.2x and funds from operations (FFO) to total debt declined to 0.3% from 4.3%. The deterioration of the company's credit metrics in 2012 mainly reflects the worsening operating conditions. In addition, the company's free operating cash flow has been very negative in the past several years because Ultrapetrol has continually invested in new vessels, particularly platform-service vessels that are deployed in Brazil.
We assess Ultrapetrol's liquidity position as "weak." The company had cash holdings of $14.8 million as of Sept. 30, 2012, and its short-term debt totaled $35.6 million. Our liquidity assessment also considers the following facts and assumptions: -- Ultrapetrol's sources of liquidity (such as cash holdings, projected cash generation, and contracted credit lines) will correspond to less than 0.8x of the uses of liquidity (debt maturities, working capital needs, and capital expenditures) during the next 12 months; -- The company has significant maturities in 2014, when $180 million convertible bonds will come due; -- The projected capital expenditures for 2013 will remain higher than the $40 million level, reflecting the company's existing investment contracts for new vessels, but it should decrease from then onwards as the new vessels are delivered; and -- No dividend payments until the company is able to present profits in its operations.
We expect to resolve the CreditWatch listing when the uncertainties surrounding the announced agreement with Southern Cross have been dissipated and as we obtain more clarity on the impact the deal will have on Ultrapetrol's stakeholders. Considering the information available so far, we could affirm or raise the rating (possibly by one notch) if the transaction closes successfully, depending on the magnitude of liquidity and capital structure improvement due to the capital injection, assuming no negative impact to existing debtholders. We could lower the rating by one notch if the agreement does not go through because Ultrapetrol's financial position would continue to weaken, in our view. We will closely monitor any possible changes to the existing proposal as the negotiations with the stakeholders unfold.
Related Criteria And Research
-- Criteria Methodology: Business Risk/Financial Risk Matrix Expanded, Sept. 18, 2012
-- Methodology and Assumptions: Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011
-- 2008 Corporate Ratings Criteria, April 15, 2008
Ratings List Ratings Affirmed; CreditWatch/Outlook Action To From Ultrapetrol (Bahamas) Ltd. Corporate Credit Rating B-/Watch Dev/-- B-/Stable/-- Senior Secured B-/Watch Dev B-