Mersin, Turkey’s leading container port in 2018, is looking to issue five-year US$550mn notes. Proceeds from the issue will be used to refinance the US$450mn notes due August 2020 and for general corporate purposes, potentially including shareholder distributions. According to Bloomberg, IPT is in the high 5% area.
We see Mersin as a strong stand-alone credit capable of generating high cash flows in a challenging market environment and partially protected from FX risk in Turkey. Our main concern relates to the high shareholder distributions and the reliance of bondholders on shareholders’ judgement about their magnitude within a 3x net leveraged covenant.
We believe the new issue should pay a premium over an agglomeration of Turkish bonds maturing around 2024 – KCHOL, TUPRST, TURKTI – as their dividend policies are formalised and have been tested through the cycle.
We believe Mersin’s bonds could be interesting at 6%, which puts them at a roughly equal spread over the sovereign to SISETI 26s – the bonds of a similarly rated listed Turkish issuer operating on a considerably bigger scale – but not much tighter that that. We have a Hold recommendation on the MERSIN 20s.
- Strong financials: High profitability and cash generation. In the 12 months to end-H1, Mersin’s revenues came to US$319mn, EBITDA was US$223mn, corresponding to an EBITDA margin of 70%. Most of the debt was represented by the US$450mn bonds due 2020. The company’s net leverage stood at 1.5x and interest coverage at 8.2x in H1. Mersin’s profitability has been high historically, with an EBITDA margin in the range of 60-70% since 2014. With at least half of the port's tariffs set in US dollars while 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.
- Mersin seemed 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 attribute the change in the cash distribution policy to the change in the shareholder structure in 2017, when a new shareholder took 40% ownership of the business. In 2018, in addition to the US$62mn of dividends, US$270mn was upstreamed to shareholders in an interest free seven-year loan. We believe the change in the shareholders and the new policy of taking the cash out of the company and replacing it with debt weakens Mersin’s financial profile. Future bondholders will compete for cash flows with the shareholders without any control over the situation. The only protection comes in the form of 3x net leverage debt incurrence, which, on the H1 19 numbers, could permit an additional US$335mn of debt.
- Mersin’s containerised cargo throughput came to 1.4mn 20-foot equivalent units (TEUs) in 9M 19 which, on an annualised basis, leaves the port’s 2.6mn TEUs capacity under-utilised. In the next round of investments, which are most likely to be debt funded, the company plans to add another 1.2mn TEUs throughput capacity by 2024.