In Focus: Global Ports – commercial port demands attention
Initiating GLYHO 21s with a Sell. Global Ports Holding (GPH) is a cruise and commercial port operator in the Mediterranean and beyond. 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 experienced a 6% yoy decline in revenues in H1 19. 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. 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.
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.
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Recap of the week’s key credit developments
Ukraine (UKRAIN): On Friday, S&P upgraded Ukraine’s long-term foreign currency rating to B from B-, following a similar move to B by Fitch on 6 September. S&P cited rising foreign reserves, stronger growth and a declining fiscal deficit. Another supporting factor for the rating decision was the commencement of programme discussions, based on the press release on Friday at the conclusion of the IMF mission.
Saudi Arabia (KSA): On Monday, Fitch downgraded Saudi Arabia’s credit rating, to A from A+. The outlook is stable. Geopolitical and military tensions in the region – recent attacks on oil infrastructure – caused a temporary suspension of over half the country’s oil production. Fitch said that although full production was restored by the end of September, the risk of further attacks remains and Saudi Arabia is vulnerable to escalating regional tension. Fitch also cited the deterioration of Saudi Arabia’s fiscal and external balances. The agency expects continued fiscal deficits and general government debt of 26% of GDP in 2021, up from 16% in 2018. International reserves remain very high, and a current account surplus of 3.5% of GDP is forecast this year, albeit down from 9.2% in 2018. Further tensions could lead to rising oil price and subsequent fiscal and external account improvements. The Saudi Ministry of Finance has said that it is disappointed by the rating change.
Lebanon (LEBAN): On Tuesday, Moody’s placed Lebanon’s Caa1 rating under review for downgrade, amid concerns over the ability to meet public finance needs. Recent tightening of external financing conditions and a reversal in bank deposit inflows were cited by the ratings agency, and have contributed to the deteriorating balance of payments stance.
Ethiopia (ETHOPI): Fitch affirmed Ethiopia’s rating at B on Tuesday, but revised the outlook to negative. The negative outlook reflects the potential for negative economic consequences from further political instability, such as further increases in inflation, declines in tax collection and declines in FDI inflows. The B rating reflects strong growth, high government debt and low foreign reserves.
Namibia (REPNAM): Also on Tuesday, Fitch downgraded Namibia’s long-term foreign currency rating by one notch to BB. Fitch cited both a deteriorating fiscal stance and growth prospects, and now expects a 1.9% economic contraction this year.
Metinvest (METINV): The company completed a liability management transaction. The tender offer launched in September received sufficient investor interest allowing the company to redeem the targeted US$440mn on par value of the US$945mn 7.75% notes due 2023, and replacing it with longer dated debt. The company issued new US$500mn 7.75% notes due 17 Oct 2029, with a yield-to-maturity (YTM) of 7.95% and EUR300mn 5.625% notes due 17 June 2025 at 5.75% YTM. We expect that ongoing weakness in the steel market and iron ore prices coming off their peaks, and UAH appreciation will continue to put pressure on profit margins in H2 19, making additional cash quite handy. We have a Hold recommendation on METINV bonds.
Kernel (KERPW): The company reported strong FY 20 financials with the top line driven by expanding trading operations, and EBITDA supported by high yields in the farming segment. We like Kernel’s credit profile, but we don’t expect KERPW 22s to outperform MHPSA despite an optically wide spread. Kernel is looking to issue new US$300-350mn bonds with maturity of 5-7 years. We reiterate our Hold recommendation on KERWP 22s.
Nordgold (NORDLI): The international gold producer with assets located in Africa (55% of output) and Russia (40%), has returned to the debt capital market issuing a US$400mn 4.125% notes due 2024. The pricing of the new deal looks tight, but it does not come without a reason. Low issuance out of Russia, upbeat momentum in gold prices, positioning in the middle of the global cost curve and strong shareholders could explain why the new deal was benchmarked against its sister company Severstal (CHMFRU 24s – 3.23% YTM) and a much bigger and more cost-efficient gold producer Polyus (PGILLN 24s – 3.41%YTM). The bonds of a smaller gold producer – Petropavlovsk (POGLN 22s – 8.43% YTM) and GeoProMining (GEOPRO 24s – 7.17% YTM) offer massive premia over NORDLI 24s and could see their credit spreads tighten on the back of its tight pricing. We have a Buy recommendation on the POGLN 22s.