Rating Action Overview
- Australia-based landlord port Port of Newcastle's (PON) credit quality is underpinned by its captive position as the key export gateway for high quality Hunter Valley coal and close proximity to Asian markets.
- PON's cash flow is likely to be relatively stable over the next few years supported by steady coal export volumes, agreed escalation in prices with shippers, and stable revenue from the company's property portfolio.
- On Sept. 13, 2021, S&P Global Ratings assigned its 'BBB-' long-term issuer rating to Port of Newcastle Investments (Financing) Pty Ltd. (PONF). PONF is the sole financing vehicle for the wider PON group.
- The outlook on PONF is stable, reflecting the company's strong market position and our expectation that its FFO-to-debt ratio will recover to around 8%-9% over the next few years and that trade diversification will slowly increase over the medium to long term.
Rating Action Rationale
The 'BBB-' issuer credit rating on PONF reflects PON's strong market position as the primary export gateway for Hunter Valley coal. PON ships all coal exports from the Hunter valley region, given the lack of alternative ports. The port's geographical location incorporating the coal-rich Hunter Valley region within its immediate hinterland and the captive nature of coal exports from this region underpin its strong business risk profile. In addition, we believe the presence of well-established coal terminals and abundant land, transport links, and other export infrastructure at the port is supportive of future trade growth and planned non-coal trade diversification over the next decade. As a landlord port, PON is responsible for providing infrastructure and property to port users but does not provide stevedoring or other shipping related services.
We anticipate coal demand will remain stable, underpinning the company's cash flow over at least the next 10 years, if not beyond. PON's stable earnings are driven by anticipated steady demand for thermal coal in end markets throughout Asia-Pacific. This is due to our expectation that Asian markets will have a high degree of reliance on coal-fired electricity generation over this period. In addition, the high quality of Hunter Valley thermal coal, the cost competitiveness of local mines, and proximity of Australia to Asian end markets is anticipated to support demand. Currently, PON exports about 155-165 million tons per annum (mtpa) of coal and we expect this could remain within this range over the next 10 years. Coal export port charges currently account for about 60% of PON's revenues and EBITDA.
PON's statutorily enforceable charges and modest property revenues also support cash flow visibility. Port-related agreements are bilaterally entered into with shippers on a long-term basis and allow PON to reliably recover its operational and capital costs. Escalating, generally, at the higher of 4% or the consumer price index (CPI) they provide a hedge against inflationary pressures protecting the company's EBITDA margin and cash flow. Secure long-term property leases with fixed rate increases per year or indexed to inflation account for 25% of revenues. Coal terminal leases account for about 60% of the property income. While this is secure at least over the next 10 years in line with our view on coal exports, it is an indirect exposure that PON will have to manage over the long term.
PON's excessive trade concentration in thermal coal moderates our business risk assessment while recognizing there is a need and commitment to diversify over the next 10 years. Coal trade currently constitutes around 60% of total revenues (51% thermal and 9% metallurgical) and 96% of total trade volumes. Higher margin diversified trade (bulk, grain, liquids, and some containers) contributes only 14% of total revenues and 4% of total trade volumes. Shareholders and management recognize the need to diversify into non-coal trade over the medium to longer term given the uncertainty of coal volumes over the long term. While the port's physical infrastructure can support such diversification, this will require progressive and targeted capital investment over the next five to 10 years. We also believe that over time, PON will not only need to improve its non-coal trade volumes but sustain them amid competition from other facilities to consolidate its business position.
Financial discipline will be required to balance substantial proposed diversification capital spending to 2030 and beyond. PON plans to undertake A$250 million in diversification related investments over 2021-2025 in non-thermal coal related activities. This is anticipated to contribute incrementally to EBITDA and total around 6% of EBITDA by 2025. In addition, a further A$250 million in further diversification projects has been identified from 2026-2030. As such, we believe substantial ongoing investments will be required to improve trade diversification and reduce exposure to coal. While shareholders have the expertise and commitment to support the strategy, we believe this may require sustained financial discipline to operate within metrics consistent with the rating.
We anticipate PON's credit metrics will improve over the next few years, with funds from operations (FFO) to debt of 8%-9% in calendar years 2022 and 2023. PON has a credible plan to improve and consolidate its FFO to debt metrics over the next one to two years, consistent with the rating. Committed debt amortization, tight controls on debt funding of capital expenditure (capex), and a distribution holiday (including nonpayment of interest on shareholder loans) until 2024 should see FFO to debt improve to 8%-9% by 2023 from 6.5%-7.5% in fiscal 2021. As a result, we expect to see our adjusted debt levels remaining fairly stable at about A$850 million-A$900 million over our forecast period. The improving metrics trend line is captured through our comparable rating modifier.
Outlook
The stable outlook on PONF reflects the port's strong market position for coal exports, our expectation that its FFO-to-debt ratio will recover to around 8%-9% over the next few years, and that trade diversification will slowly increase over the medium to long term. During this time, and as PON undertakes its diversification capex program, we expect that shareholders will exercise distribution restraint to support its credit metrics.
Downside scenario
We could lower the rating if PON is unable to manage its proposed capital investment program or restrain distributions in line with our current expectations. FFO to debt consistently below 7.5% would leave minimal headroom available to accommodate any unexpected trade volatility, capex overruns, or other demands on cash.
Similarly, we could lower the rating if there was a material deterioration in PON's key thermal and metallurgical coal markets compared to our current expectations. This could include a substantial weakening in the anticipated demand profile in end markets such that anticipated volumes materially fall or became more volatile.
Upside scenario
We would consider an upgrade if the company were to maintain FFO to debt above 10%, supported by the adoption of appropriate financial policies. We see the trend line in its financial metrics currently limiting potential upside over the next two to three years.
Company Description
PONF is the common financing vehicle of the wider PON group, which consists of the asset owner Port of Newcastle Investments (Property) Trust and the operating entity Port of Newcastle Investments (Holdings) Trust, in addition to each entities' subsidiaries. PON's current shareholders are China Merchant Port Holdings Co. (CMP) and The Infrastructure Fund (TIF), which each hold a 50% stake in the group.
Both CMP and TIF have extended shareholder loans (A$331 million in total) to PON on a 50/50 basis. We treat these loans as equity for analytical purposes reflecting the loans' deep subordination to senior debt, unsecured status in the capital structure, ability to defer interest payments at all times, restrictions to call or demand until all senior debt is fully paid, and inability to trigger an event of default.
Our Base-Case Scenario
Assumptions
- Asia-Pacific GDP growth of 6.7%, 4.9%, and 4.8% and CPI growth of 1.9%, 2.1%, and 2.2% over 2021, 2022, and 2023, respectively;
- Australian GDP growth of 4.9%, 3.3%, and 2.6% and CPI growth of 2.0%, 2.1%, and 2.2% over 2021, 2022, and 2023 respectively;
- Coal export volumes to be relatively stable and grow at between 0%-2% over the forecast period, independent of the GDP trend line;
- Diversified trade volumes to grow in line with longer term average of around 1%-2% over the forecast period;
- Trade charges to escalate in line with bilateral agreements;
- Property revenues to grow by 2%-3% in 2022 and 2023 underpinned by agreed rental increases;
- EBITDA margins to improve from around 59%-61% in 2021 to 66%-68% by 2023 as transition costs ease having peaked in 2020;
- Capex of around A$20 million in 2021 growing to A$55 million to A$65 million a year as diversification projects commence;
- All in cost of debt of around 4.4%-4.7%;
- No dividends with the exception of minimal amount paid for shareholder tax purposes over forecast period;
- Suspension of shareholder loan interest over forecast period;
- No cash income taxes.
Key metrics
Port of Newcastle Investments (Financing) Pty Ltd. --Key Metrics* | ||||||||
---|---|---|---|---|---|---|---|---|
--Fiscal year ended Dec. 31-- | ||||||||
(Mil. AUD $) | 2021f | 2022f | 2023f | |||||
Coal volumes (mtpa) | 158-163 | 160-165 | 160-165 | |||||
EBITDA | 95-100 | 105-110 | 115-120 | |||||
EBITDA margin (%) | 59-61 | 63-65 | 66-68 | |||||
Funds from operations (FFO) § | 57-62 | 67-72 | 73-78 | |||||
Capital expenditure | 17-22 | 55-65 | 55-65 | |||||
Dividends | 8-10 | 8-10 | 16-18 | |||||
Debt | 850-890 | 850-900 | 850-900 | |||||
Debt to EBITDA (x) | 8.6-8.8 | 7.9-8.1 | 7.4-7.6 | |||||
FFO to debt (%)§ | 6.5-7.5 | 8-9 | 8-9 | |||||
FFO interest coverage (x) | 2.5-2.7 | 2.7-2.9 | 2.7-2.9 | |||||
*All figures adjusted by S&P Global Ratings. § - 2021 FFO to debt calculation excludes one for settlement payment to ATO. a--Actual. e--Estimate. f--Forecast. |
Liquidity
We consider PON to have adequate liquidity. We forecast the company's sources of liquidity to exceed uses by more than 1.2x over the next 12 months, and we expect net sources to remain positive, even if EBITDA declines by 15%.
We expect the company's stable revenue streams and strategy to maintain sufficient capex, working capital facilities, and cash balances to adequately cover the capital works and committed debt amortization. Besides the capex facility, PON intends to maintain about A$50 million in cash and working capital facilities combined at all times. Our analysis incorporates minimal dividend distributions and suspension of shareholder loan interest over the next 12 months.
PON has about A$788 million of debt maturing in July 2023 and A$160 million due in May 2026. It has plans to extend its debt maturity profile through access to capital market issuance or longer tenor bank debt. We expect the port to manage its debt refinancing well ahead of its maturity and maintain a weighted average debt tenor of well above two times given the long-term nature of its assets and operations. We also expect PON to have minimum exposure to foreign currency or interest rate exposure risks as part of its risk management strategy.
As of June 30, 2021, PON's capital structure consisted of A$938 million of unrated drawn senior secured syndicated bank facilities raised at the PONF level and A$331 million of shareholder loans. There is no debt at the operating or asset holding company levels, and we do not expect debt at these levels at any time.
Principal liquidity sources
- Cash and cash equivalents of about $63 million as of June 30, 2021.
- Undrawn bank lines of around A$70 million to A$75 million as of June, 2021.
- Cash FFO of about A$45 million to A$50million over the course of the next 12 months.
Principal liquidity uses:
- Capex of around A$38 million to A$43 million over the next 12 months ending June 30, 2022.
- Minimal dividends of about A$7 million to A$12 million over the next 12 months ending June 30, 2022.
- Debt amortization of around A$30 million and no further debt maturities over the course of the next 12 months.
Covenants
PON is required to maintain an interest coverage ratio of above 1.2x and also maintain a maximum gearing ratio (net financing debt/[shareholder equity + net financing debt]) of less than 70% under its senior secured bank facilities. PON currently has sufficient headroom against these covenants even if EBITDA were to decline by 15%. In addition, PON is committed to amortizing its debt facility through a cash sweep mechanism under its debt documents, which should restrain debt increases to a large extent. While PON can draw additional debt under its capex facilities to fund expansion capex, certain undertakings around this additional drawing should ensure a measured and EBIDTA accretive debt increase over the medium term.
Environmental, Social, And Governance
For PON, environmental factors are most pertinent to its credit quality due to its commodity concentration in coal, which constitutes 96% of trade volumes (80% thermal and 16% metallurgical) and around 60% of revenues. Demand for thermal coal could present a challenge to the business if Asian countries transition more quickly than currently expected from coal-based electricity generation to other forms of generation. If this occurred, it would have negative knock-on effects on volumes. That said, PON's coal export volumes are high quality relative to global producers and we anticipate demand to persist over the next 10 years at least. We note that management is enacting plans to diversify trade volumes, but this will require substantial investment over the next decade at least.
Like all coastal ports, PON is exposed to adverse weather-related events directly and indirectly, which can have short-term effects. This includes storms and droughts, which can result in some volatility in trade volumes depending on severity. To manage this risk, PON has undertaken climate scenario analysis to understand and position itself to be able to mitigate these weather events.
As a landlord port, PON is less exposed to social factors when compared to operating ports given it is not responsible for landside operations. This means the port has far more limited exposure to potential industrial action in comparison to stevedores and operating ports. PON also recognizes there will be social risks associated with a transition away from the fossil fuels that the region is currently dependent on. PON's current diversification strategy recognizes and is supportive of an equitable transition by putting in place plans now to support social and economic stability through any such transition.
We assess the company's governance as satisfactory.
Ratings Score Snapshot
Issuer Credit Rating: BBB-/Stable/--
Business risk: Strong
- Country risk: Very low
- Industry risk: Low
- Competitive position: Strong
Financial risk: Aggressive
- Cash flow/Leverage: Aggressive
Anchor: bb+
Modifiers
- Diversification/Portfolio effect: Neutral (no impact)
- Capital structure: Neutral (no impact)
- Financial policy: Neutral (no impact)
- Liquidity: Adequate (no impact)
- Management and governance: Satisfactory (no impact)
- Comparable rating analysis: Positive (+1 notch)
Stand-alone credit profile: bbb-
Related Criteria
- General Criteria: Group Rating Methodology, July 1, 2019
- Criteria | Corporates | General: Corporate Methodology: Ratios And Adjustments, April 1, 2019
- Criteria | Corporates | General: Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Dec. 16, 2014
- Criteria | Corporates | General: The Treatment Of Non-Common Equity Financing In Nonfinancial Corporate Entities, April 29, 2014
- General Criteria: Methodology: Industry Risk, Nov. 19, 2013
- Criteria | Corporates | General: Corporate Methodology, Nov. 19, 2013
- General Criteria: Country Risk Assessment Methodology And Assumptions, Nov. 19, 2013
- General Criteria: Methodology: Management And Governance Credit Factors For Corporate Entities, Nov. 13, 2012
- General Criteria: Principles Of Credit Ratings, Feb. 16, 2011
Ratings List
New Rating | |
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Port of Newcastle Investments (Financing) Pty Ltd. |
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Issuer Credit Rating | BBB-/Stable/-- |
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Primary Credit Analyst: | Alexander Dunn, Melbourne + 61 (3) 96312120; alexander.dunn@spglobal.com |
Secondary Contact: | Parvathy Iyer, Melbourne + 61 3 9631 2034; parvathy.iyer@spglobal.com |
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