(The following statement was released by the rating agency) Fitch Ratings-Sydney-March 31: Fitch Ratings has affirmed the 'BBB-' rating on the senior secured debt issued by DBCT Finance Pty Limited, the financing vehicle for Australia-based DBCT Management Pty Limited, which operates the Dalrymple Bay Coal Terminal (DBCT). The Outlook is Stable. RATING RATIONALE The rating reflects the ongoing stable cash flow provided by DBCT'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. DBCT's fee structure allows a regulated return on capital and pass-through of operating and maintenance costs to users. DBCT's narrow franchise and current year net debt/regulated asset base (RAB) of 79% position the rating at the lower end of the 'BBB' category. The coronavirus pandemic increases the risk of a downturn in the coal sector. Fitch's rating case contemplates a throughput volume decline of approximately 10% in 2020 based on the following assumptions of quarterly traffic activity: modest impact in 1Q20; severe downturn in 1Q20; stabilising in 3Q20; and partial recovery from 4Q20. This is reflected in a reduction in contracted capacity at DBCT. In 2021, Fitch assumes a recovery of the coal sector to 2019 levels. A more severe sensitivity case assumes traffic declines continue at the same peak traffic loss of 2Q20 for an additional quarterly period followed by a recovery at similar levels to the rating case. However, DBCT is well-positioned to withstand such a downturn, which is reflected in the Fitch rating case. Its contracts with its users are on a ship-or-pay basis, and users must continue to pay their fees even if capacity is reduced or the terminal is required to shut down due to a force majeure event. If any user defaults, the other users would fund the resulting revenue shortfall on a pro rata basis, insulating the terminal from a single user default. A protracted thermal coal-sector downturn could pressure the margins of port users and their ability to comply with the ship-or-pay agreements. Default by one or more users or lower coal production at the source mines and consequently actual throughput would raise terminal fees per tonne of coal shipped for the remaining users, increasing any financial stress. The pandemic and related government containment measures worldwide create an uncertain global environment for the coal sector in the near term. DBCT's performance data, through the most recently available issuer data, have not indicated impairment, but material changes in revenue and cost profiles are occurring across the Asia-Pacific region and will worsen in coming weeks and months as economic activity suffers and government restrictions are maintained or expanded. Fitch's ratings are forward-looking and Fitch will monitor pandemic-related developments in the sector for severity and duration, and incorporate revised base- and rating-case qualitative and quantitative inputs based on our expectations for performance and assessment of key risks. KEY RATING DRIVERS Low-Cost Coal Mine Customers - Revenue Risk (Volume): Midrange DBCT is the most competitive coal terminal serving the central Bowen Basin, in Queensland, in terms of location and port fees. Mines in the DBCT 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. DBCT's coal exports are diversified across Asia and Europe; China accounts for less than 25% of exports, limiting DBCT's exposure to a slowdown in Chinese demand. Stable Regulation; Cost Pass-Through - Revenue Risk (Price): Midrange DBCT benefits from a 4.5-year weighted-average life take-or-pay contracts with 17 coal mines. 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 DBCT 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 DBCT's operation and maintenance costs. Fitch views the regulation as transparent and predictable, with changes in borrowing rates taken into account. Customer associates, which currently represent around 88% of contracted capacity, own the operator of DBCT, limiting the risk of dissatisfaction with the handling charge. Rigorous Capital Planning - Infrastructure Development and Renewal: Midrange DBCT 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 DBCT. Completed projects are submitted to the regulator - the Queensland Competition Authority - for approval and inclusion in the RAB, which allows DBCT to earn the regulated rate of return on the investment. The regulator has never rejected a capex application by DBCT, 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 require any expansion of the port's 85 million tonnes per annum (mtpa) capacity; planned 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 DBCT is financed with senior secured bullet debt. Variable rates are approximately 81% 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 DBCT with two other publicly rated coal-export terminals in Australia: Newcastle Coal Infrastructure Group Pty Ltd (NCIG, senior secured rating BBB-/Stable)) and Adani Abbot Point Terminal Pty Ltd (AAPT, senior secured rating BB+/RWN). NCIG has longer-term contracts than DBCT, with 10-year rolling terms, but is largely tied to its existing user group. DBCT has a larger number of potential users in the Bowen Basin and has demonstrated its ability to take business from other coal-export terminals. DBCT 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. AAPT's users also have take-or-pay contracts, but with a weighted-average term of more than six years, longer than DBCT's weighted-average life of 4.5 years. Both terminals have a similar mix of users without parent-company guarantees and some concentration. DBCT has a better competitive position than AAPT with regard to location and pricing, helping it take throughput from AAPT in the past. We have also compared DBCT'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 DBCT's revenue. The net debt/RAB ratios for the networks ranged from 67% to 73% in 2019, indicating that DBCT's rating is well-positioned with its net debt/RAB of 79%. RATING SENSITIVITIES Developments that May, Individually or Collectively, Lead to Negative Rating Action: - a sustained increase in the Fitch rating case net debt/RAB ratio materially above 80%; or - DBCT'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. Developments That May, Individually or Collectively, Lead to Positive Rating Action: - a sustained rise in coal prices and production in DBCT's catchment area, accompanied by fully contracted capacity at DBCT; and - the Fitch rating case net debt/RAB ratio dropping and staying below 75%. Best/Worst Case Rating Scenario Ratings of public finance 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, go to www.fitchratings.com/site/re/10111579. TRANSACTION SUMMARY DBCT'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 DBCT Management under a 50-year lease with a 49-year extension option. CREDIT UPDATE After the spot price for metallurgical coal remained close to USD200 per tonne for the first half of 2019, the market softened, with the price settling near USD135 per tonne. More recently it has strengthened to above USD150 per tonne, with the price rise attributed to disruption in Chinese coal production as a result of the coronavirus. Financial results for 2019 were in line with management plans. EBITDA was about 1% below Fitch's rating case forecast for last year, due mainly to lower inflation that forecast. DBCT's next debt maturity is a USD300 millin private placement maturing in April 2020. Refinancing of that facility has been finalised with five of DBCT's existing bank lenders. DBCT had 16.5mpta of contracts that were reaching the end of their term in June 2019, but those contracts were all extended for a further five years. In addition, DBCT entered into new contracts that increased their contracted level (at 31 December 2019) to 79.2mpta, which gradually steps up to 84.1mpta, close to full capacity. Higher contracted capacity does not directly affect DBCT's financial performance, but could lower cost for users per tonne of contracted capacity, improving DBCT's competitive position among coal-export terminals. FINANCIAL ANALYSIS Fitch's base case assumes an average contracted capacity over the next five years of 81.8mtpa and inflation of 1.9% in 2019 and 2.0% thereafter. For borrowing costs, it assumes a current base rate of 1.0% and a refinancing margin of 1.8%. Fitch's base case results in the DSCR averaging 1.77x over the forecast debt amortisation period of 2032 to 2052, and an average net debt/RAB of 80% over the next five years. Fitch's rating case makes the following adjustments to the base case: - debt base rate: 100bp increase, which affects the unhedged portion of DBCT's debt until the 2021 regulatory reset - refinancing margin: 100bp increase, which assumes that the regulator does not recognise the increase and therefore does not reflect it in regulated TIC revenue - operating unit costs: 5% increase passed through to users, which affects DBCT's competitive position - contracted capacity: we assume an immediate reduction of 10mpta in contracted capacity, which increases charges for remaining users. Criteria Variation The analysis includes a variation from the 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 DBCT. 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 DBCT Finance has an ESG Relevance Score of 4 in the category 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. Except for the matters discussed above, the highest level of ESG credit relevance, if present, is a score of 3. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity(ies), either due to their nature or to the way in which they are being managed by the entity(ies). For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg. DBCT Finance Pty Limited ----DBCT Finance Pty Limited/Debt/1 LT; Long Term Rating; Affirmed; BBB-; RO:Sta Contacts: Primary Rating Analyst David Cook, Director +61 2 8256 0363 Fitch Australia Pty Ltd Level 15 77 King Street Sydney NSW 2000 Secondary Rating Analyst James Hodges, Associate Director +61 2 8256 0377 Committee Chairperson Sajal Kishore, Senior Director +65 6796 7095
Media Relations: Peter Hoflich, Singapore, Tel: +65 6796 7229, Email: peter.hoflich@thefitchgroup.com; Leslie Tan, Singapore, Tel: +65 6796 7234, Email: leslie.tan@thefitchgroup.com. Additional information is available on www.fitchratings.com Applicable Criteria Infrastructure and Project Finance Rating Criteria (pub. 24 Mar 2020) (including rating assumption sensitivity) https://www.fitchratings.com/site/re/10114533 Ports Rating Criteria (pub. 24 Mar 2020) (including rating assumption sensitivity) https://www.fitchratings.com/site/re/10114315 Applicable Model Numbers in parentheses accompanying applicable model(s) contain hyperlinks to criteria providing description of model(s). 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