Sept 05 -
Summary analysis -- Hutchison Ports (U.K.) Ltd. ------------------- 05-Sep-2012
CREDIT RATING: A-/Stable/A-2 Country: United Kingdom
Primary SIC: Marine cargo
Credit Rating History:
Local currency Foreign currency
30-Jun-2003 A-/A-2 A-/A-2
12-Jun-2003 A-/A-1 A-/A-1
The rating on U.K.-based marine cargo handling company Hutchison Ports (U.K.) Ltd. (HPUK) reflects its status as a fully consolidated subsidiary and holding company for the port interests in the U.K. of Hong Kong-based conglomerate Hutchison Whampoa Ltd. (HWL; A-/Stable/-), whose ports and related services division, Hutchison Port Holdings (HPH; not rated), is one of the world’s largest independent port operators and developers. In our view, the parent company would provide support to HPUK if needed. As a result, the ratings and outlook on HPUK are equalized with those on its main parent.
Standard & Poor’s Ratings Services assesses HPUK’s stand-alone credit profile at ‘bb’. We consider HPUK’s business risk profile to be “strong”, reflecting the company’s strong business position, owing to its ownership of the Port of Felixstowe Ltd. (not rated), the largest container port in the U.K. HPUK generates fairly stable cash flows and resilient operating margins, even during periods of economic downturn. Although we believe that HPUK will maintain its position as a market leader, secured by high barriers to entry in the port industry, we anticipate increasing competition when the London Gateway port becomes operational.
On the other hand, we assess HPUK’s financial risk profile as “aggressive”. This reflects the company’s relatively high leverage alongside weak cash flow protection measures. Our assessment of financial risk also takes into account HPUK’s significant investments in its U.K. port infrastructure, which is only deferrable to a limited extent and is necessary for the company to maintain its competitive position. Nevertheless, we understand that HPUK would benefit from parental support from HWL if needed.
S&P base-case operating scenario
We believe that volumes throughput at HPUK will be impaired by the weak economic environment in the U.K. However, in our view, increases in prices and cost-cutting measures should support the company’s EBITDA for 2012.
Our base-case scenario for 2012 and 2013 assumes modest growth in volumes, moving somewhat in line with U.K. GDP. We estimate that in 2012 and 2013, GDP will increase by 0.5% and 1.0%, respectively. We also estimate that the company will increase its prices in line with, or slightly below, inflation. We expect that Consumer Price Index inflation will be 2.7% in 2012 and 2.2% in 2013 for the U.K. Taking account of these factors, as well as cost-cutting measures, we forecast that reported EBITDA will reach GBP86.5 and GBP90 million in 2012 and 2013, respectively, and that the reported EBITDA margin will remain at 28%.
S&P base-case cash flow and capital-structure scenario
In view of the bullet repayment on HPUK’s fixed-interest-rate, 17-year, GBP325 million bond due in 2015, cash flow protection measures will remain low, in our opinion. We believe that HPUK’s future cash flow adequacy and capital structure will depend on the timing, financing requirements, and sources of funds for the company’s medium- and long-term expansion plans. Accordingly, our base-case scenario does not include additional debt to fund extraordinary investments over the next two years. As a result, we forecast that the company’s cash flow protection measures will remain relatively stable within this period, specifically, Standard & Poor’s-adjusted funds from operations (FFO) to total debt and total debt to EBITDA of about 12%-13% and 6x, respectively.
We assess HPUK’s liquidity position as “strong” under our criteria. In the 12 months to August 21, 2013, we anticipate that sources of liquidity will cover uses of liquidity by 2.5x, and that coverage will remain in excess of 1x for the following year.
As of Aug. 21, 2012, HPUK’s key sources of liquidity over the next 12 months include:
-- Cash and long-term investments of approximately GBP55.4 million; and
-- Our forecast of funds from operations of about GBP51.7 million.
Our credit scenario factors in the following liquidity needs over the next 12 months:
-- Capital needs of about GBP33.2 million in the 12 months to August 2013;
-- Dividends of about GBP5 million; and
-- No maturities before Dec. 31, 2015.
The documentation for HPUK’s GBP325 million bond contains financial covenants stipulating that the company should maintain EBITDA to consolidated net interest expense of no less than 2x. A dividend lockup would be triggered if this were to fall to less than 3x. This ratio has been about 4x for the past two years.
The stable outlook on HPUK reflects that on its parent, HWL. The rating on HPUK could come under pressure if HWL deviates materially from its articulated financial leverage target and its liquidity significantly weakens, such that its cash and liquid funds are less than total borrowings due during the next two years. Furthermore, we could lower the rating if HWL’s adjusted ratio of consolidated debt to capital exceeds 50% on a sustained basis, which could happen if its debt-funded investments and acquisitions are more than we expect; and cash-flow protection, which has been steadily improving due to the turnaround of its 3G business, weakens and shows no signs of recovering.
We consider upside potential to the rating as limited at this stage due to HWL’s modest credit ratios. However, we may raise the rating if strategic transactions, including divestments, spin-offs, and initial public offerings result in a substantial reduction in HWL’s consolidated borrowings, and the 3G business maintains positive free cash flow as it expands its operating scale. We consider the credit profile to have improved if the ratio of adjusted consolidated funds from operations to debt of more than 30% is sustained.
We consider it highly likely that the parent company would provide support to HPUK, should this be necessary. Any change to the rating or outlook on HPUK would most likely mirror that on the parent company. However, any indication that HWL’s strategic relationship and support has weakened could also result in a change in the rating on HPUK.
Related Criteria And Research
All articles listed below are available on RatingsDirect on the Global Credit Portal, unless otherwise stated.
-- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008
-- Criteria Methodology: Business Risk/Financial Risk Matrix Expanded, May 27, 2009
-- Parent/Subsidiary Links; General Principles; Subsidiaries/Joint Ventures/Nonrecourse Projects; Finance Subsidiaries; Rating Link to Parent, Oct. 28, 2004
-- Methodology and Assumptions: Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011