Initiating GLYHO 21s with a Sell. Global Ports Holding (GPH) is a cruise and commercial port operator in the Mediterranean and beyond. The company runs 13 cruise and two cruise and commercial ports in nine countries. GPH is one of the smallest and most leveraged corporate bond issuers in Turkey. The company’s small size is partially compensated by its high operating cash flows and low exposure to the TRY FX risk due to US$- and EUR-denominated revenues (and partially costs). However, the company’s M&A appetite, weak operating results and outlook for Akdeniz port – the key guarantor of the bonds – and the need to address refinancing of GLYHO 21s are likely to continue putting pressure on credit spreads. An early bond refinancing deal and/or recovery at Akdeniz could improve outlook on the bonds. In the absence of positive triggers, we expect GLYHO 21s to underperform Turkish corporate and sovereign universe and assign a Sell recommendation to the notes.
Revenue under pressure from weak commercial port performance. In H1 19, GPH reported US$55mn in revenues posting a 3.4% yoy decline. Cruise ports have done well delivering a 6.5% yoy growth on the back of recovering traffic in Turkish ports and Valletta. However, this was not enough to fully offset the poor performance of commercial ports, which lost 10% yoy in revenues. Commercial port Akdeniz (Turkey), a guarantor of GLYHO 21s and the single biggest asset of the company generating 48% of the top line and 60% of EBITDA, experienced a 6% yoy decline in revenues in H1 19. Specialising in container, bulk and general cargo, the port has seen container throughput falling 18% yoy in H1 19 to 80,000 TEU, and general and bulk cargo, mainly represented by marble and cement, experience a 48% yoy decline to 335,000 tonnes. According to management, there have been no signs of a turnaround at Akdeniz yet.
Profitability remains high. GPH has historically seen high profitability with the EBITDA margin, both in its cruise and commercial operations, exceeding 60%. The weak performance of Akdeniz port in the aftermath of a severe TRY depreciation, was largely offset by strong momentum in the cruse port segment, with consolidated EBITDA declining 4.6% yoy to US$32mn (see page 2). The traditionally high conversion of EBITDA to operating cash flow suffered from an increase in working capital, driving operating cash flows almost down to zero in H1 19. According to management, more than two-thirds of this move was related to ill-timed one-offs, which reversed in July 2019, after the reporting date. Cruise ports in the Mediterranean set their tariffs in EUR and commercial ports in Turkey in US dollars, making the top line resilient to TRY depreciation, while partial TRY-denominated costs support profitability.
Limited deleveraging options. With M&A in cruise operations remaining a core element of GHP’s strategy and commercial ports facing a challenging operating environment, we don’t expect the company to reduce leverage. However, due to low debt repayments until the end of 2021, there are no immediate liquidity concerns. On a consolidated basis and before any adjustments, GPH’s net debt/EBITDA came to 4.8x and the EBITDA interest coverage ratio was 2.8x, characterising the company’s leverage as high. The bulk of GPH’s debt (c65%) is represented by US$250mn 8.125% notes due 14 November 2021. Under the term of the notes, GPH would not be permitted to incur debt if debt/EBITDA ratio goes above 5x. According to the company, the leverage ratio stood at 4.2x in H1 19. The calculation does not include the recent adjustment resulting from the implementation of IFRS 16 and non-recourse debt of unrestricted subsidiaries. In the medium-term, GPH management aims to decrease leverage to 3x through EBITDA growth rather than debt repayment.
Bond structure emphasises importance of Akdeniz. The issuer of US$250mn bonds is a holding company that relies on dividends of its subsidiaries to pay interest and repay debt. According to our estimate, GPH received a small amount of US$5.6mn from the biggest cruise ports under its management (Barcelona and Valletta) in 2018, not least because of large minority interests. GPH controls 62% of the biggest and fully consolidated cruise port asset BPI (Barcelona and Malaga Cruise Ports) and 56% in Valletta Cruise Port, implying that substantial part of any dividend distribution goes to the third parties. This emphasises the role of Akdeniz, a guarantor of the notes and the single biggest contributor to the consolidated revenues and EBITDA.