Fitch Affirms Dalrymple Bay Finance Pty Limited at 'BBB-'; Outlook Stable

(The following statement was released by the rating agency) Fitch Ratings-Sydney-24 March 2021: Fitch Ratings has affirmed the 'BBB-' rating on the senior secured debt issued by Dalrymple Bay Finance Pty Ltd, the financing vehicle for Australia-based Dalrymple Bay Infrastructure Management Pty Ltd, which operates the Dalrymple Bay Terminal (DBT). The Outlook is Stable. RATING RATIONALE The ratings reflect the ongoing stable cash flow provided by DBT's take-or-pay contracts, mainly with low-cost metallurgical coal mines, and the ability to socialise revenue losses from a user default or non-renewal of a contract. DBT's fee structure allows a regulated return on capital and pass-through of operating and maintenance costs to users. DBT's narrow franchise and current-year net debt/regulated asset base (RAB) of 76% position the rating at the lower end of the 'BBB' category. Fitch's financial assumptions and forecasts for DBT are based on the continuation of the current regulations for the duration of the concession. If the regulations are amended or terminated following the final decision on the 2019 Draft Access Undertaking by the Queensland Competition Authority (QCA), Fitch will adjust its financial projections to reflect the new regime. In this respect, we are cognisant of the uncertainty around the impact of the QCA's final decision, particularly in the context of the judicial review of the Treasurer of Queensland's decision that DBT's declaration should be extended for a further 10 years. KEY RATING DRIVERS Low-Cost Coal Mine Customers - Revenue Risk (Volume): Midrange DBT is the most competitive coal terminal serving the central Bowen Basin in Queensland, in terms of location and port fees. Mines in the DBT catchment area are mainly in the lower half of the global seaborne export metallurgical coal cash-cost curve. We perceive the metallurgical coal market as more stable than the thermal coal market. DBT's coal exports are diversified across Asia and Europe; China typically accounts for approximately 25% of exports, limiting DBT's exposure to China's ban on Australian coal. Stable Regulation; Cost Pass-Through - Revenue Risk (Price): Midrange DBT benefits from the 8.5-year weighted-average life for its take-or-pay contracts with 17 coal mines, based on fully ramped up contracted capacity of 84.2 million tonnes per annum (mtpa) from July 2022. The weighted-average contract life increased from 4.8 years in early 2020 and reflects the 8X Expansion process, in which DBT requested users to exercise extension options so that it could determine if an expansion is necessary to meet demand in the access queue. Revenue associated with a defaulting or non-renewing contract is socialised immediately following termination across the remaining customers on a pro rata basis via increased fees. The fees are composed of a regulated terminal infrastructure charge (TIC) and a handling charge. The TIC allows DBT to earn a market rate of return on its RAB and is reset every five years, with the last reset effective on 16 February 2017 with pricing backdated to 1 July 2016. The handling charge fully passes through DBT's operation and maintenance costs. Fitch views the regulation as transparent and predictable, with changes in borrowing rates included. Customer associates, which make up 86% of contracted capacity, own the operator of DBT, limiting the risk of dissatisfaction with the handling charge. Rigorous Capital Planning - Infrastructure Development and Renewal: Midrange DBT has a strong capital expenditure process that is initiated by the management of the user-owned operator. A capex project requires review and approval by the operator board, the user group and the board of DBT. Completed projects are submitted to the regulator, the QCA, for approval and inclusion in the RAB, which allows DBT to earn the regulated rate of return on the investment. The regulator has never rejected a capex application by DBT, although it can do so if prior approval from the operator board or user group is not received. The financial forecasts used by Fitch do not currently require any expansion of the port's 85 mtpa capacity, but DBT has started the process for the 8X Expansion, which would expand capacity to 99.1 mtpa. Planned non-expansionary expenditure is for items such as replacement capex, improvements to port operations, safety enhancements and compliance with environmental regulations. Well-Managed Maturity Profile - Debt Structure: Midrange DBT is financed with senior secured bullet debt. Variable rates are approximately 80% hedged, with hedges aligned with the five-year regulatory periods to minimise the risk of a mismatch with regulated revenue. Lenders benefit from a six-month debt-service reserve account as well as lockup and default gearing levels (debt/RAB) and debt-service coverage ratios (DSCR) in the debt covenants. Foreign-currency debt is fully swapped back to Australian dollars. Refinancing risk is managed through a well-laddered maturity profile and proactive refinancing in advance of maturities. PEER GROUP Fitch compared DBT with two other publicly rated coal-export terminals in Australia: Newcastle Coal Infrastructure Group Pty Ltd (NCIG, senior secured rating BBB-/Stable) and North Queensland Export Terminal Pty Ltd (NQXT, senior secured rating BB+/Stable). NCIG has longer-term contracts than DBT, with 10-year rolling terms, but is largely tied to its existing user group. DBT has a larger number of potential users in the Bowen Basin and has demonstrated its ability to take business from other coal-export terminals. DBT ships mostly metallurgical coal used for steel-making, while NCIG is more dependent on thermal coal, which Fitch views as having greater risk due to the global political and environmental pressures on the power-generation sector. NQXT's users also have take-or-pay contracts, with a comparable weighted-average term of more than six years. Both terminals have a similar mix of users without parent-company guarantees and some concentration. DBT has a better competitive position than NQXT with regard to location and pricing. NQXT's lower rating reflects more limited financing options, which compounds the structural refinancing risk of its bullet debt maturities. We have also compared DBT's net debt/RAB with that of two regulated utility networks rated by Fitch, including AusNet Services Limited (BBB+/Stable) and a similarly rated issuer, due to the regulated nature of part of DBT's revenue. The net debt/RAB ratios for the networks ranged from 63% to 67% in 2020, indicating that DBT's rating is well-positioned with its net debt/RAB of 76%. RATING SENSITIVITIES Factors that could, individually or collectively, lead to positive rating action/upgrade: - a sustained rise in coal prices and production in DBT's catchment area, accompanied by fully contracted capacity at DBT; and - the Fitch rating case net debt/RAB ratio dropping and staying below 75%. Factors that could, individually or collectively, lead to negative rating action/downgrade: - a sustained increase in the Fitch rating case net debt/RAB ratio materially above 80%; or - DBT's contracted capacity falling due to a customer default or non-renewal of contract, resulting in higher customer fees that negatively affect its competitive position among Queensland coal-export terminals. Best/Worst Case Rating Scenario International scale credit ratings of Sovereigns, Public Finance and Infrastructure issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of three notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit [https://www.fitchratings.com/site/re/10111579]. TRANSACTION SUMMARY DBT's nameplate capacity of 85mtpa makes it the largest and lowest-priced coal-export terminal serving the Bowen Basin, which has the country's highest-quality metallurgical coal and low average costs relative to other coal-producing regions globally. The terminal is at the Port of Hay Point in Queensland, Australia. The Queensland government leases it to DBI Management under a 50-year lease with a 49-year extension option. CREDIT UPDATE As a result of the pandemic, the premium hard coking coal (HCC) price averaged USD123per tonne (t), free-on-board basis (FOB), in 2020, compared to an average of USD181/t FOB throughout 2019. Despite this decline in prices, over 85% of DBT's user mines are estimated to have continued to generate positive margins, according to AME. DBT refinanced USD552 million (about AUD777 million) of debt in the US private placement market in September 2020. The transaction consisted of six tranches - half in Australian dollars and half in US dollars - with tenors ranging from 7 to 12 years. DBT has take-or-pay contracts with 17 coal mines, based on fully ramped up contracted capacity of 84.2 mtpa from July 2022. Higher contracted capacity does not directly affect DBT's financial performance, but could lower cost for users per tonne of contracted capacity, improving DBT's competitive position among coal-export terminals. FINANCIAL ANALYSIS Fitch's base case assumes an average contracted capacity over the next five years of 83.7mtpa and inflation of 2.1% in 2021, 2.2% in 2022 and 2.0% thereafter. For borrowing costs, it assumes a current base rate of 0.85% and a refinancing margin of 3.0%. Fitch's base case results in the DSCR averaging 1.4x over the forecast debt amortisation period of 2032 to 2052, and an average net debt/RAB of 76% over the next five years. Fitch's rating case makes the following adjustments to the base case: - debt base rate: 50bp increase, which affects unhedged portion of debt over the next regulatory reset period - operating unit costs: 5% increase passed through to users, which affects DBT's competitive position - contracted capacity: we assume an immediate reduction of 10mpta in contracted capacity, which increases charges for remaining users. Fitch's rating case results in an average net debt/RAB of 76% over the next five years. Criteria Variation The analysis includes a variation from Fitch's Ports Rating Criteria. The criteria do not specify metrics to be used for regulated ports and therefore do not indicate rating thresholds for net debt/RAB. However, they do indicate that relevant metrics may be used. Fitch has therefore used net debt/RAB as the primary metric in the financial analysis, as it is the most relevant for regulated assets such as DBT. In addition, Fitch has referred to regulated utility networks in addition to Australian unregulated coal-export terminals in the peer comparison. REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING The principal sources of information used in the analysis are described in the Applicable Criteria. ESG Considerations Dalrymple Bay Finance has an ESG Relevance Score of 4 for Governance: Management Strategy. This is because the company's bullet-amortisation debt structure compounds the risk of limited refinancing options due to lenders' increasing concerns over coal assets. This has a negative impact on the credit profile and is relevant to the rating in conjunction with other factors. Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg Dalrymple Bay Finance Pty Ltd ----Dalrymple Bay Finance Pty Ltd/Debt/1 LT; Long Term Rating; Affirmed; BBB-; Rating Outlook Stable Contacts: Primary Rating Analyst James Hodges, Associate Director +61 2 8256 0377 Fitch Australia Pty Ltd Suite 15.01, Level 15 135 King Street Sydney 2000 Secondary Rating Analyst Harini Ravishankar, Senior Analyst +65 6796 7220 Committee Chairperson Sajal Kishore, Senior Director +65 6796 7095 Media Relations: Peter Hoflich, Singapore, Tel: +65 6796 7229, Email: peter.hoflich@thefitchgroup.com Additional information is available on www.fitchratings.com Applicable Model Numbers in parentheses accompanying applicable model(s) contain hyperlinks to criteria providing description of model(s). Third-party Model(24 March 2020 (https://www.fitchratings.com/site/re/969858)) Additional Disclosures Dodd-Frank Rating Information Disclosure Form (https://www.fitchratings.com/site/dodd-frank-disclosure/10156358) Solicitation Status (https://www.fitchratings.com/site/pr/10156358#solicitation-status) Additional Disclosures For Unsolicited Credit Ratings (https://www.fitchratings.com/site/pr/10156358#unsolicited-credit-ratings-disclosures) Endorsement Status (https://www.fitchratings.com/site/pr/10156358#endorsement-status) Endorsement Policy (https://www.fitchratings.com/site/pr/10156358#endorsement-policy) ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTPS://WWW.FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS (HTTPS://WWW.FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS). IN ADDITION, THE FOLLOWING HTTPS://WWW.FITCHRATINGS.COM/RATING-DEFINITIONS-DOCUMENT (https://www.fitchratings.com/rating-definitions-document) DETAILS FITCH'S RATING DEFINITIONS FOR EACH RATING SCALE AND RATING CATEGORIES, INCLUDING DEFINITIONS RELATING TO DEFAULT. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE CODE OF CONDUCT SECTION OF THIS SITE. DIRECTORS AND SHAREHOLDERS RELEVANT INTERESTS ARE AVAILABLE AT HTTPS://WWW.FITCHRATINGS.COM/SITE/REGULATORY (https://www.fitchratings.com/site/regulatory). FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR WHICH THE LEAD ANALYST IS BASED IN AN ESMA- OR FCA-REGISTERED FITCH RATINGS COMPANY (OR BRANCH OF SUCH A COMPANY) CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH RATINGS WEBSITE. Copyright © 2021 by Fitch Ratings, Inc., Fitch Ratings Ltd. and its subsidiaries. 33 Whitehall Street, NY, NY 10004. Telephone: 1-800-753-4824, (212) 908-0500. Fax: (212) 480-4435. Reproduction or retransmission in whole or in part is prohibited except by permission. All rights reserved. In issuing and maintaining its ratings and in making other reports (including forecast information), Fitch relies on factual information it receives from issuers and underwriters and from other sources Fitch believes to be credible. Fitch conducts a reasonable investigation of the factual information relied upon by it in accordance with its ratings methodology, and obtains reasonable verification of that information from independent sources, to the extent such sources are available for a given security or in a given jurisdiction. The manner of Fitch's factual investigation and the scope of the third-party verification it obtains will vary depending on the nature of the rated security and its issuer, the requirements and practices in the jurisdiction in which the rated security is offered and sold and/or the issuer is located, the availability and nature of relevant public information, access to the management of the issuer and its advisers, the availability of pre-existing third-party verifications such as audit reports, agreed-upon procedures letters, appraisals, actuarial reports, engineering reports, legal opinions and other reports provided by third parties, the availability of independent and competent third- party verification sources with respect to the particular security or in the particular jurisdiction of the issuer, and a variety of other factors. Users of Fitch's ratings and reports should understand that neither an enhanced factual investigation nor any third-party verification can ensure that all of the information Fitch relies on in connection with a rating or a report will be accurate and complete. Ultimately, the issuer and its advisers are responsible for the accuracy of the information they provide to Fitch and to the market in offering documents and other reports. In issuing its ratings and its reports, Fitch must rely on the work of experts, including independent auditors with respect to financial statements and attorneys with respect to legal and tax matters. Further, ratings and forecasts of financial and other information are inherently forward-looking and embody assumptions and predictions about future events that by their nature cannot be verified as facts. As a result, despite any verification of current facts, ratings and forecasts can be affected by future events or conditions that were not anticipated at the time a rating or forecast was issued or affirmed. The information in this report is provided "as is" without any representation or warranty of any kind, and Fitch does not represent or warrant that the report or any of its contents will meet any of the requirements of a recipient of the report. A Fitch rating is an opinion as to the creditworthiness of a security. This opinion and reports made by Fitch are based on established criteria and methodologies that Fitch is continuously evaluating and updating. Therefore, ratings and reports are the collective work product of Fitch and no individual, or group of individuals, is solely responsible for a rating or a report. The rating does not address the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned. Fitch is not engaged in the offer or sale of any security. All Fitch reports have shared authorship. Individuals identified in a Fitch report were involved in, but are not solely responsible for, the opinions stated therein. The individuals are named for contact purposes only. A report providing a Fitch rating is neither a prospectus nor a substitute for the information assembled, verified and presented to investors by the issuer and its agents in connection with the sale of the securities. Ratings may be changed or withdrawn at any time for any reason in the sole discretion of Fitch. Fitch does not provide investment advice of any sort. Ratings are not a recommendation to buy, sell, or hold any security. Ratings do not comment on the adequacy of market price, the suitability of any security for a particular investor, or the tax-exempt nature or taxability of payments made in respect to any security. Fitch receives fees from issuers, insurers, guarantors, other obligors, and underwriters for rating securities. Such fees generally vary from US$1,000 to US$750,000 (or the applicable currency equivalent) per issue. In certain cases, Fitch will rate all or a number of issues issued by a particular issuer, or insured or guaranteed by a particular insurer or guarantor, for a single annual fee. Such fees are expected to vary from US$10,000 to US$1,500,000 (or the applicable currency equivalent). The assignment, publication, or dissemination of a rating by Fitch shall not constitute a consent by Fitch to use its name as an expert in connection with any registration statement filed under the United States securities laws, the Financial Services and Markets Act of 2000 of the United Kingdom, or the securities laws of any particular jurisdiction. Due to the relative efficiency of electronic publishing and distribution, Fitch research may be available to electronic subscribers up to three days earlier than to print subscribers. For Australia, New Zealand, Taiwan and South Korea only: Fitch Australia Pty Ltd holds an Australian financial services license (AFS license no. 337123) which authorizes it to provide credit ratings to wholesale clients only. Credit ratings information published by Fitch is not intended to be used by persons who are retail clients within the meaning of the Corporations Act 2001 Fitch Ratings, Inc. is registered with the U.S. Securities and Exchange Commission as a Nationally Recognized Statistical Rating Organization (the "NRSRO"). While certain of the NRSRO's credit rating subsidiaries are listed on Item 3 of Form NRSRO and as such are authorized to issue credit ratings on behalf of the NRSRO (see https://www.fitchratings.com/site/regulatory), other credit rating subsidiaries are not listed on Form NRSRO (the "non-NRSROs") and therefore credit ratings issued by those subsidiaries are not issued on behalf of the NRSRO. However, non-NRSRO personnel may participate in determining credit ratings issued by or on behalf of the NRSRO.