EP BCo, Issuer Of Port Terminal Operator Euroports, Rated 'BB-'; Outlook Stable

  • Special purpose company, EP BCo S.A. (EP), has been set up to raise a senior term loan and senior revolving and second-lien facilities to finance the proposed acquisition of port operator group, Euroports.
  • Euroports has a satisfactory competitive position as a diversified port terminal operator, but with relatively high leverage and weaker profitability than other infrastructure transportation companies, such as the port owners.
  • We assess EP as a highly strategic subsidiary of the Monaco Resources Group (MRG). We believe EP is partially protected from a potential intervention and/or deterioration of MRG's credit quality due to the significant minority shareholding by the Belgium sovereign funds PMV and FPIM.
  • As a result, we could rate EP up to two notches higher than our assessment of MRG's credit quality. We are therefore assigning our 'BB-' long-term issuer credit rating to EP and our 'BB-' issue and '3' recovery ratings to EP's proposed seven-year €315 million term loan B and six-year €25 million senior revolving credit facility (RCF). We are assigning our 'B' rating to EP's eight-year €105 million second-lien facility.
  • The stable outlook reflects our opinion that modest volume growth and price increases will help the group to maintain its operating performance, adequate liquidity, and credit metrics in line with the rating.
LONDON (S&P Global Ratings) May 13, 2019--S&P Global Ratings today took the rating actions listed above. The ratings on EP primarily reflect the stand-alone credit quality of the EP group and its port terminal operating business, Euroports, and our view that the EP group is partially protected from potential negative intervention from its majority shareholder, MRG, whose credit quality we see as weaker than Euroports'. The ring-fencing comes from the fact that MRG acquired 53.16% in Euroports in a consortium with Belgium sovereign wealth funds PMV (23.42%) and FPIM (23.42%). We understand that the transaction will be funded by raising a €315 million term loan B, €25 million senior RCF, and €105 million second-lien facility.
We assess EP's stand-alone credit profile (SACP) at 'bb-'. This reflects our view of Euroports' well-connected network of strategically located port terminals in Europe and China (including Antwerp, Rostock, Ghent, Tarragona, and Changshu). Terminal areas are located near key production or consumption regions for EP's core seven commodities (sugar, forest products, metals, fertilizer and minerals, agribulk, fresh and frozen and coal) with large import/export flows to and from Europe and other continents. Despite its exposure to commodity market risk and some revenue concentration on the top 20 clients (50% of the total revenues), Euroports handles diverse commodities through longstanding relationships of more than 10 years with a varied industrial customer base.
Euroports operates its terminal areas under long-term concession or lease agreements with extension provision for most of the terminals. Three terminal areas have concessions expiring in the next two-to-four years, but none of these concessions would materially affect Euroports' balance sheet if not renewed apart from Changshu (contributing about 6%-8% of the group's total EBITDA). That said, we understand from management that renewal risk is limited as negotiations are advanced.
Euroports generated low S&P Global Ratings-adjusted EBITDA and S&P Global Ratings-adjusted EBITDA margin in 2018 of €80.7 million and 13.3%, respectively, which is below average for the transportation infrastructure sector. This is partly explained by its exposure to the low-margin logistic business and the few of the non-profitable terminals it operates.
We note some degree of earnings volatility because of Euroports' exposure to trade volume and commodity prices and changes in the group's perimeter with business divestments and acquisitions. These factors have been partially mitigated by Euroports' ability to secure contracts of three-to-four years, representing about 45% of the total revenues including Manuport Logistics (MPL). Euroports has also been managing some critical client contracts on a long-term, minimum take-or-pay basis, providing earnings stability. We believe the main challenges for Euroports include improving operations and results from its developing terminals, and delivering revenue and cost synergies between MRG and Euroports.
We expect EP group's consolidated debt and credit metrics to remain relatively leveraged. In particular, we expect the adjusted weighted-average ratio of funds from operations (FFO) to debt in 2019-2021 will be about 7%-8% and debt to EBITDA 5x-6x.
We see Euroports as highly strategic to its main new sponsor, diversified natural resources holding company MRG (53.16% stake), because of its strategic fit with the shareholder's logistics business. We believe EP will enhance MRG's scale and diversity with exposure to less volatile industries than its existing trading and marketing metals businesses. We expect EP to contribute about 65%-70% of the group's total reported EBITDA on a fully consolidated basis. In our view, MRG's financials will remain highly leveraged after it takes on more debt to fund its pro-rata stake in the acquisition of Euroports.
At the same time, the ratings on EP could differ by up to two notches from MRG's credit quality thanks to the protections from the significant minority shareholders and their powers under the shareholder agreement. While MRG will control EP--given its significant influence on EP's management and board--the minority shareholders (PMV and FPIM have a combined 46.84% stake) have veto on a number of important matters including EP group's budget, dividends, new borrowings, any transaction or agreement with the shareholder, and voluntary bankruptcy. Therefore, we believe the two sovereign wealth funds can exercise active oversight and joint decision making when it comes to Euroports' strategy and cash flows. In addition, there are certain restrictions in the financial documentation, which prevents dividend distribution unless leverage is below 4.25x.
In our analysis, we focus on the credit quality of the consolidated group up to the ultimate parent company, Thaumas N.V. The group includes the operating subsidiary Euroports Netherlands and the issuer of the bonds, EP BidCo; and we understand that there are no other financial liabilities at other group companies.
EP's 'bb-' SACP reflects our expectations that its port operating business, Euroports, will sustain its resilient operating performance, underpinned by modest demand growth, price increases, and cost-control capabilities. This should enable the group to maintain a credit profile commensurate with the rating. We consider adjusted FFO to debt of at least 7% and debt to EBITDA no greater than 6.0x-6.5x to be consistent with the 'bb-' SACP. Furthermore, we assume the company will implement a sufficiently cautious financial policy to support credit measures consistent with the rating.
We could rate EP up to two notches above MRG's credit quality based on protections related to significant minority interests.
We could lower our rating on EP if we revise downward our view of MRG's credit quality as a result of additional leverage at MRG or operational underperformance of its riskier trading business. We could also lower the rating if we believe the insulation between MRG and EP has weakened. This will depend on the stability of the shareholder pact and the way they execute the agreed terms under the shareholders' agreement.
We could revise downward EP's SACP if it made an unexpected, aggressive debt-funded acquisition or shareholder returns, or due to an unforeseen significant setback in operating performance, materially weakening credit measures (driving FFO to debt below 7% and debt to EBITDA above 6.5x for example) or liquidity.
We are unlikely to raise the rating in the near term due to our view of MRG's highly leveraged profile and its potential effect on Euroports' financial profile.
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