Fixed Income Analysis /
Turkey

Mersin: Initiation – Refinancing instead of repayment

    Kiti Pantskhava
    Kiti Pantskhava

    Senior Credit Analyst

    Tellimer Research
    3 September 2019
    Published by

    Initiating with a Hold. Mersin, Turkey’s leading container port in 2018, has a US$450mn 5.88% 2020 bond maturity approaching. Despite a weakening Turkish lira (TRY), the company remains highly profitable and cash generative due to largely US$-denominated tariffs and the continued growth of containerised cargo throughput. Mersin seemed to be on track to accumulate enough liquidity to repay the bonds, but a decision to upstream cash reserves through a loan to shareholders made refinancing the only option. We estimate annualised total return on Mersin bonds at 5.5%, c1.4% over the short-term KCHOL 20s and SISETI 20s, repayment of which has been pre-funded in the bond market earlier this year. Mersin has yet to make refinancing arrangements. Other things being equal, Mersin’s strong financial profile should allow it to roll over debt either through bonds or loans, while shareholder-creditor relationship can be addressed in terms of the new facility.

    Double digit throughput growth despite economic headwinds. Based on the World Bank and company’s disclosures, we estimate that Mersin accounted for c17% of containerised cargo throughput in Turkey in 2018. Despite severe local currency depreciation, the port increased its container throughput by 8.2% to 1.72mn twenty-foot equivalent units (TEUs) in 2018 and doubled the pace to 16% yoy, handling c1mn TEUs in H1 19. However, conventional cargo volumes fell 11% yoy to 7.4mt in 2018 and were flat yoy at 4.1mt in H1 19. Mersin could increase container throughput without significant investments as current volumes are well below its 2.6mn TEU capacity.

    Ownership risks come to the fore. Mersin is 51% owned by PSA International (an AA-rated leading international port group with 81mn TEUs throughput and US$3bn in revenues in 2018), 39% by Global Infraco and 10% by Akfen Holding. Originally, the business was established as a 50-50 partnership between PSA and Akfen, but in 2017, the shareholder structure took its current shape. Until recently, related party transitions were quite limited to draw attention, but in October 2018, Mersin lent US$270mn to its shareholders in a seven-year interest-free loan. The company distributed most of the then available accumulated cash reserves on top of the regular dividend payments.

    Refinancing of US$450mn is due in 2020. Before lending money to shareholders, Mersin was on track to accumulate enough cash to redeem US$450mn in August 2020. Now, with ‘only’ US$93mn cash left in 2018, the company could turn to the bond market for refinancing. In 2018, Mersin’s net leverage came to 1.7x and EBITDA covered interest with a ratio of 8:1. More than 95% of Mersin’s debt is represented by the outstanding bonds, which impose certain covenants on the issuer, including a net leverage threshold of 3x to incur additional debt barring a US$205mn permitted debt carve-out. The company was compliant with debt covenants at the end of 2018. Mersin’s high profitability, strong positive free cash flows (US$153mn in 2018), ample liquidity and a relatively low sensitivity to FX risk make a strong case for smooth debt refinancing in normal market conditions.   

    US$-denominated port tariffs support revenues. Mersin operates under a concession agreement valid for another 24 years, allowing the port to price its services in US dollars. Despite a 33% yoy TRY depreciation in 2018, Mersin posted a 2.3% growth in port revenues in 2018, mainly driven by container operations, which contributed 75% to the consolidated top line. We estimate that c40% of revenues could be generated by import operations, indirectly exposing the company to FX risk. If importers cannot pass through the higher transport costs on to customers, they may have to cut volumes or seek better terms in other ports. It is worth mentioning that despite the TRY depreciation, containerised cargo imports volumes increased in 2018, although the conventional cargo import saw a significant mid-teen decline. The financial report for H1 19 has not been released yet, but operating results point to a 16% increase in container throughput and stable conventional cargo volumes, suggesting that 2019 pricing has been supportive for volumes. 

    High profitability and cash generation. Mersin’s profitability has been high historically with an EBITDA margin of 68% in 2018. Since port tariffs are set in US dollars and costs are mainly incurred in TRY, depreciation tends to have a positive effect on profitability as long as it is not outpaced by domestic cost inflation. EBITDA goes hand in hand with operating cash flows, which exceeded US$200mn in 2018. Mersin has no significant capex commitments and interest rate on its debt is fixed, making shareholder decisions about distribution of free cash flows central to the port’s investment case. Mersin pays dividends every year and can upstream cash to shareholders in the form of loans.