Flash Fixed Income Report /
Uruguay

Uruguay's Corporacion Navios's new issue: An unusual potential star

    Rafael Elias
    Rafael Elias

    Director, Latin America Credit

    Tellimer Research
    11 June 2019
    Published by

    Uruguay's Corporacion Navios, S.A. (CNSA), is expected to come to market today with a US$483mn of senior secured bonds. CNSA is a wholly owned subsidiary of Navios South American Logistics (NSAL) and owner of an iron ore trans-shipment terminal facility built in 2017, located in the tax-free zone of Nueva Palmira, Uruguay. It provides port facilities for iron ore shipments to Vale International, S.A. under a 20-year take-or-pay contract

    The terminal has an annual throughput capacity of 10mn tons (up to 6mn support the loan discussed below) as well as static strorage capacity of 700,000 tons.

    The bonds will be collateralised by the interest on the loan discussed below, with the loan secured by all rights arising from a "Vale Contract" (consisting of cash flows payments by Vale,) the shares of CNSA and the majority of CNSA's assets. The bonds will also be guaranteed on a senior unsecured basis by CNSA, will fully amortise by 2037 have an 18.2 year maturity and an average life of 13.2 years.

    The Vale Contract locks in 20 years of revenues for a minimum guaranteed quantity (MGQ) of 4mn tons annually, and has 18 years remaining. The MGQ is expected to generate cUS$41mn in EBITDA during 2019 and an expected 20-year aggregate EBITDA of US$1.2bn. Revenues from the contract are set up to increase at c4% per year, based on a U.S. expected normalised inflation rate of c2%. 

    The tariff adjustment formula consists of:

    1. 75% of each tariff being increased by the US rate of inflation, plus 2%;
    2. 25% of each tariff being increased by the rate of annual salary inflation in Uruguay, as recorded on 1 January of each year, and further adjusted for any variation in the U.S. dollar-to-Uruguay peso exchange rate since 1 January of each preceding year.

    The expected ratings for the bonds are BBB- (S&P) and BB+ (Fitch).

    The issuer of the bonds will be Mineral Logistics, a special-purpose vehicle (SPV) with Walkers Fiduciary Limited, a Cayman Islands entity acting as trustee of Mineral Logistics (the "Issuer" or the "Trust"). 

    The issuer will, in turn, use the proceeds of the bond to make a loan to CNSA, which, in its turn, will use the proceeds of the loan: 1) to pay fees and expenses; 2) to fund reserve accounts; and 3) for general corporate purposes, including a distribution to NSAL.

    Initial price talk is in the "high 7.0%" area. We believe its closest comparable is Brazil's US$600mn 5.95% Hidrovias International Finance SARL (HIDRVS) bond due 2025 (Ba3/NR/BB), which trades at cUS$99.967 (ALLQ) to yield c5.95% (g-spread 401bps; z-spread 401bps), with a duration of c4.746 years.

    Given the difference between the two bonds – including but not limited to Hidrovias not being a full comparable but merely the sole company that we believe is engaged in maritime and river transportation and logistics in South America, that its bonds are senior unsecured, that its ratings are lower and that its duration is much shorter – we see the c100-200bps spread over HIDRVS (depending on how close to 8% "high 7.0%" implies, and where the bonds end up printing) as fair-to-tight.

    That said, because of the recent drought of new issues, the absence of comparables, the scarce Uruguayan paper, the secured nature of the bonds and the strength of Navios's counterparty, we believe the bonds will most likely come in the "mid 7.0% area". However, they will likely meet strong demand in the primary market and trade well following the initial allocations, potentially tightening in the secondary.

    The issue is expected to be priced and launched today.