Fitch Affirms Adani Abbot Point Terminal at 'BBB-'; Outlook Stable.
The ratings take into account the stable cash flows from the medium- to long-term take-or-pay contracts with the port's users. AAPT is well-located to serve coal mines in the northern and central Bowen Basin in Queensland, as well as the large mines under development in the Galilee Basin. The user contracts allow a full pass-through of fixed and variable operating expenses. The terminal is unregulated. It resets its tariffs every five years and when it enters into new contracts. Users can seek arbitration at the time of reset in the event that they do not agree with AAPT's determination of the terminal infrastructure charge (TIC).
The port's reliance on coal limits the rating even though a majority of the coal that passes through the port is metallurgical, which Fitch views as having less risky long-term demand than thermal coal. While Australian exporters are vulnerable to long-term changes in global coal-market dynamics, Fitch's analysis demonstrates AAPT's strong resilience to low coal prices.
AAPT's high leverage constrains the ratings. Debt/EBITDA will peak at 10.0x in 2022 in Fitch's rating case but will drop below 7.5x in 2024 once a contract with Adani Mining starts. The bullet structure of the debt creates refinancing risk, although AAPT has demonstrated strong access to capital markets.
KEY RATING DRIVERS
Mainly Low-Cost Users: Volume Risk - Midrange
Fitch considers AAPT a secondary port as it solely handles coal. The port's users provide some diversity of product and sources but AAPT is highly concentrated, split approximately 60%/40% between metallurgical and thermal coal. The production cash costs of the metallurgical mines are mainly in the lower half of the curve and are well below Fitch's long-term price forecast of USD110/tonne. While the thermal coal mines are grouped at the high end of the cost curve, they also benefit from producing profitable metallurgical coal. Contracted capacity is less than the nominal capacity of 50 million tonnes per annum (mtpa). Adani Mining has signed a contract for 9.3 mtpa beginning 2023 to service its Carmichael Mine that is under development in the Galilee Basin.
AAPT has strong rail transportation links with its customers, particularly those in the northern Bowen Basin that are relatively close to the port; these represent 26 mtpa of contracts. For the mines further south, AAPT faces greater exposure to competition from the lower-cost Dalrymple Bay Coal Terminal (DBCT) about 200 km to the southeast. DBCT is now effectively fully contracted, limiting the competitive impact in the near term. Mines under development in the Galilee Basin in central Queensland are planning rail lines to link to Abbot Point. Fitch expects any new port facilities to be substantially more expensive than AAPT because of higher construction costs.
Medium-Term Ship-or-Pay Contracts: Price Risk - Midrange
AAPT benefits from a weighted-average contract life of more than eight years of ship-or-pay contracts, which total 40.7 mtpa of capacity. Although AAPT is not regulated, users pay a TIC that allows AAPT to earn a market return on its depreciated asset value. Fixed and variable operations and maintenance costs are passed through to the users. Payment is on a ship-or-pay basis, and no force majeure waiver exists.
AAPT resets the TIC every five years based on an updated return calculation and forecast of capex to be incurred during the next five years. The users can refer the calculation to arbitration to contest the price. If any user does not renew or defaults, the TIC for the remaining users is increased at the next price reset to maintain AAPT's return. Fitch believes that in practice, the TIC is a negotiated outcome between AAPT and its users, as occurred in 2012, resulting in the charge generally rising with inflation. For the 2017 price reset, AAPT has agreed on tariffs with half of the users, while the rest have requested arbitration.
Well-Funded Maintenance: Infrastructure Development and Renewal - Midrange
The port's capacity expansion to 50 mtpa was completed in 2012 and it is fully operational. AAPT incurred around AUD120 million of capex over the past five years, including the upgrade and replacement of a ship loader and a stacker-reclaimer, which were added to the depreciated asset value used in the TIC calculation, in accordance with the technical advisor's recommendations in 2012. We forecast annual maintenance capex at around AUD6 million, covered by cash flow from operations.
Debt Structure - Midrange
The bullet debt structure creates refinancing risk, which is offset by the spread of maturities, the long concession (to 2110) and the company's record in accessing capital markets. In the past year, AAPT successfully refinanced AUD976 million of debt that was due to mature in November 2018, issuing US144A/Regulation S bonds and Australian medium-term notes, continuing its market access expansion. Lenders benefit from a good security package, including step-in rights under a tripartite agreement with the government lessor, as well as a six-month debt-service reserve account and interest and currency hedging requirements. The cash flow coverage ratio covenants include distribution lock-up at 1.40x and default at 1.10x, which are weaker because no principal is currently being amortised. A volume-weighted average mine life of AAPT's users below 16 years triggers a 75% cash sweep to a senior debt redemption account and a debt amortisation programme would be incorporated in the next refinance structure. The cash sweep increases up to 100% if AAPT deems it necessary.
The Fitch rating case results in a 25-year project life cover ratio (PLCR) of 1.6x, indicating a good ability to amortise debt over that period, if required. The minimum interest coverage ratio is 1.6x in the fiscal year ending March 2028 (FY28), above the lock-up covenant of 1.4x. The maximum debt/EBITDA of 10.0x in 2022 is quite high, but decreases to below 7.5x from 2024, when the contract with Adani Mining starts and for which it has provided an AUD138 million security deposit to AAPT. Fitch's break-even analysis demonstrates that AAPT can sustain a contracted level as low as 23.3 mtpa, or 47% of capacity, while still covering its interest costs. This level of contracted capacity would remain cash-flow positive even if coal prices were to fall to 39% below Fitch's long-term forecasts of USD75/tonne for thermal coal and USD140/tonne for metallurgical coal.
AAPT's closest peer is Queensland-based DBCT Finance Pty Limited (BBB-/Stable), the financing vehicle for the operator of DBCT, which like AAPT, is a single-purpose coal export terminal but with a higher capacity of 85 mtpa. DBCT users also have ship-or-pay contracts but with a lower remaining weighted-average term of around five years, compared with more than eight years at AAPT. Both terminals have a similar mix of users without parent company guarantees, with some user concentration. DBCT's position is more competitive than AAPT's on location and pricing, resulting in some AAPT throughput moving to DBCT when one of AAPT's user mines was sold to a new owner that had unused contracted capacity at DBCT. Both issuers have high leverage with AAPT's debt/EBITDA reaching a maximum of 10.0x in 2022 in Fitch's rating case but falling below 7.5x in 2024 while DBCT's debt/EBITDA is 10.2x.
Newcastle Coal Infrastructure Group Pty Ltd (NCIG; BBB-/Stable), a New South Wales-based coal export terminal, is also a close peer. NCIG has a stronger contractual structure with rolling 10-year terms, although both terminals have ship-or-pay contracts, and termination by an NCIG user essentially requires a payout of the user's pro rata share of the capital cost of the terminal. Both issuers utilise bullet-maturity debt instruments, but NCIG incorporates partial amortisation and plans to fully repay its senior debt by 2038. AAPT has no amortisation planned, but benefits from a long concession that extends to 2110. AAPT's throughput consists mainly of metallurgical coal, which Fitch sees as less risky in terms of long-term demand than thermal coal, which makes up the majority of NCIG's throughput.
Port of Melbourne (BBB/Stable), the primary port of call serving the Victorian and broader south-east Australian market, has stronger key rating driver assessments including volume, price, and infrastructure development and renewal. The port has much more diverse throughput with minimal commodity exposure, unlike AAPT, which is exposed to more volatile commodities as it is used solely for coal exports. It shares with AAPT weaker refinancing risk due to the use of a bullet debt structure, although both projects have a reasonable spread of maturities. Port of Melbourne also has a similar 10-year net debt/EBITDA of 8.1x compared with AAPT's 7.9x yet AAPT lenders benefit from a stronger covenant package, including a debt-service reserve account.
Future developments that may, individually or collectively, lead to positive rating action:
- A sustained rise in coal prices, accompanied by fully contracted capacity over the medium-to-long term
- A projected five-year average net debt/EBITDA below 6.5x in Fitch's rating case
Future developments that may, individually or collectively, lead to negative rating action:
- A decline in AAPT's contracted capacity due to customer default or non-renewal of contract
- A projected five-year average net debt/EBITDA above 9.5x in Fitch's rating case
- Failure to commence addressing refinancing of debt issues at least 12 months in advance of maturity
Actual coal throughput at AAPT was 28.0 mt for the contract year ended June 2018. Operating and maintenance expense was AUD68.0 million, 2% below budget. The replacement of stacker-reclaimer SR1 was completed as part of a general programme of maintenance and improvement.
In December 2017, AAPT completed the issuance of USD500 million fixed-rate senior secured notes due December 2022. Proceeds of the issuance were used to repay the majority of the UD976 million of senior debt maturing in November 2018. In June 2018, AAPT issued AUD329 million fixed-rate senior secured notes due June 2025. The proceeds were used to fully repay the remaining senior debt that was due to mature in November 2018. As a result of the two debt issues refinancing the November 2018 maturities, AAPT's weighted-average maturity has been extended from 1.2 years to 4.2 years.
Fitch's base case assumes average contracted capacity of 42.7 mtpa in years one to five, increasing to 50 mpta once the Adani Mining contract begins. It also assumes that the TIC is settled with the remaining users at the weighted average of the TICs already agreed. We assume the margin for future refinancing beyond 2018 increases by up to 300bp. The base case results in a maximum debt/EBITDA of 7.6x in FY19 and minimum interest coverage ratio of 2.3x in FY28. The PLCR calculated over 25 years is 2.1x.
The Fitch rating case assumes average contracted capacity of 36.7 mtpa over the first five years, and rising to 41.5 mtpa in the longer term due to the assumption that some contracts are not fully renewed. It assumes that the TIC is settled with the remaining users at a level lower than the base case. The refinancing margin post-2018 is assumed to gradually rise to 400bp. The cases also assume that the base borrowing rate rises gradually to 5% from 2%. The rating case results in a maximum debt/EBITDA of 10.0x in 2022 and a minimum interest coverage ratio of 1.6x in 2028. The 25-year PLCR is 1.6x.
Full list of rating actions:
AUD329 million senior secured medium-term notes due June 2025 assigned at 'BBB-'; Outlook Stable
AUD170 million senior secured bank debt facility B due November 2020 affirmed at 'BBB-'; Outlook Stable
USD150 million US private placement due September 2021 and September 2024 affirmed at 'BBB-'; Outlook Stable
AUD100 million senior secured medium-term notes due May 2020 affirmed at 'BBB-'; Outlook Stable
USD500 million US144A/Regulation S securities due December 2022 affirmed at 'BBB-'; Outlook Stable
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|Publication:||Daily the Pak Banker (Lahore, Pakistan)|
|Date:||Jan 16, 2019|
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