(The following statement was released by the rating agency) Fitch Ratings-Sydney-April 02: Fitch Ratings has affirmed Lonsdale Finance Pty Ltd's Long-Term Issuer Default Rating (IDR) at 'BBB' with a Stable Outlook. Lonsdale Finance is the issuing entity for the Port of Melbourne. The rating reflects the Port of Melbourne's role as a primary port of call serving the Victorian and broader Australian market, with a diversified landlord port business model benefiting from a stable regulatory regime and a portfolio of long-term property leases governing operations of its well-established port facilities. The company's debt structure is senior, but the lack of strong covenants, a non-amortising profile, high gearing and considerable refinancing risk constrain its rating. RATING RATIONALE The coronavirus pandemic increases the risk of a downturn in trade volumes and container throughput. The Fitch's rating case contemplates a volume decline of approximately 10% in 2020 based on the following assumptions of quarterly traffic activity: modest impact in 1Q20; severe downturn in 2Q20; stabilising in 3Q20; and partial recovery from 4Q20. In 2021, Fitch assumes nearly a full recovery to 2019 levels. A more severe sensitivity case assumes volume declines continue at the same peak throughput loss of 2Q20 for an additional quarterly period followed by a recovery at similar levels to the rating case. Fitch's revised rating case demonstrates that the Port of Melbourne is well-positioned to withstand such a downturn. The port benefits from robust underlying growth of rent and license fees on around one-third of total revenue. The majority of leases have fixed increases at the greater of CPI+1.5% or 4%, and there is a high level of revenue diversification. The pandemic and related government containment measures worldwide create an uncertain global environment for cargo operations in the near term. The latest available issuer data may not yet indicate impairment, but material changes in revenue and cost profiles are occurring across the sector 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 Primary Port of Call - Revenue Risk (Volume): Stronger The Port of Melbourne is one of Australia's largest container ports by throughput, handling more than three million twenty-foot equivalent units (TEU) in the financial year ended June 2019 (FY19). This accounted for around 37% of Australia's mainland capital city total container traffic. The facility has over 30 commercial berths with a diverse range of operations, including motor vehicles, dry bulk, break bulk and liquid bulk cargos, in addition to containers. However, some areas of the port have limited ability to accommodate the largest ships proposed for Australian shipping routes because the Yarra River and Westgate Bridge impose access constraints. The port is in a strategic position in the heart of Melbourne, the state capital of Victoria and its largest city. It is a strong regional port with limited competition and the trade hub for Victoria, southern New South Wales, eastern South Australia and Tasmania. Victoria is Australia's most densely populated state and relies less on mining than other states, limiting commodity-price exposure and insulating the economy from mining-sector volatility. The strategic location limits the ability of shipping lines to redirect cargo on an ongoing basis; therefore, it will remain a port of call to serve this region. Supportive Regulatory Regime, Leases - Revenue Risk (Price): Stronger The port's trade-based tariff increases are set under a stable, transparent regulatory regime and monitored by an external independent body, providing high pricing certainty to the port and users. Tariff limits will be relaxed after 2037 at the latest, allowing faster increases than inflation to enable the port to earn a market return on its asset base and recover efficient costs. The port has also secured long-term lease agreements, which provide unregulated and stable cash flow of around one-third of total revenue. Most of the leases have fixed increases at the greater of the CPI+1.5% or 4.0% and some are in place for the length of the port's concession. Well-Developed Port Facilities - Infrastructure Development and Renewal: Stronger One of the port's major precincts, Webb Dock, benefits from a recent redevelopment, including a third container terminal - one of the most advanced in the world with a high degree of automation. The port is not yet at full capacity and so short-term capex requirements are limited to minor maintenance of less than AUD100 million a year. The Harbour Master's recent approvals means the Swanson Dock container terminal on the Yarra River can now cater for vessels up to 10,000 TEU. Port of Melbourne does not expect vessels larger than 10,000 TEUs to come to the port in the short to medium term, therefore ship size is unlikely to affect the port's competitive position in this period. The most recent external analysis has shown that Webb Dock may be able to accommodate vessels up to 14,000 TEU subject a combination of infrastructure investments and operational improvements over time. Staggered Bullet Maturities - Debt Structure: Midrange Lonsdale Finance's debt structure, while mostly senior in priority, is characterised by considerable refinancing risk, exclusive use of bullet maturities and a back-loaded profile with a debt balance that increases over time due to debt-funded capex requirements. A portion consists of deeply subordinated shareholder loans, but creditors are all equity partners and therefore Fitch considers this an equity instrument. The lack of structural features, such as a dedicated debt service reserve, also limits the debt structure assessment. Fitch's model assumes a majority of fixed-rate debt in the future. Fitch sees the treasury policies that lay out management's debt structure goals as positive, despite the limited covenants, but this does not fully mitigate the maturity profile and refinancing risk. Financial Profile Fitch's base case, which assumes a less severe downturn in volumes, results in average net debt/EBITDA of 8.3x over the next five years, dropping from 9.3x in FY20 to 7.7x in FY24 due to rising EBITDA, even while the net debt balance increases due to the non-amortising debt structure along with debt funding of certain capex amounts over time. Fitch's rating case forecasts a greater decline in volumes, increased operating costs and applies a 2% premium to forecast borrowing costs, resulting in an average net debt/EBITDA of 8.1x over the next five years, falling to under 7.7x by FY24. PEER GROUP Key peers include British port group ABP (senior notes issued by ABP Finance Plc rated A-/Stable) and the US-based Port of Houston Authority (TX)'s (AA/Stable). Similar to the Port of Melbourne, ABP has a diverse throughput mix and functions as the port landlord, albeit for multiple ports, which reduces operational risk significantly for both issuers. The Port of Melbourne has a rating case five-year average net debt/EBITDA of 8.3x, higher than ABP's five-year average net debt/EBITDA of 7.3x. The Port of Houston's throughput is diverse, and the port has 'Stronger' assessments for volume, price and infrastructure renewal, similar to the Port of Melbourne. The ports differ in terms of debt structure, where the Port of Houston's IDR reflects an absence of revenue-backed debt and capital improvements as it has thus far been funded via ad-valorem taxes and excess cash flow from operations, which support its higher rating. RATING SENSITIVITIES Future Developments That May, Individually or Collectively, Lead to Negative Rating Action: -Weak financial performance due to lower volume, credit erosion of terminal operators that results in payment delinquencies, increased costs, additional indebtedness for distributions or adverse regulatory rulings leading to a projected five-year average Fitch-adjusted net debt/EBITDA above 9.5x. Future Developments That May, Individually or Collectively, Lead to Positive Rating Action: -A resilient underlying performance over a number of years, especially demonstrated during an economic slowdown, in conjunction with a prudent financing strategy, leading to projected five-year average Fitch-adjusted net debt/EBITDA below 7.5x. Best/Worst Case Rating Scenario Ratings of non-financial corporate 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 four 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 www.fitchratings.com/site/re/10111579.
CREDIT UPDATE The pandemic is having sizeable and wide-ranging effects on ports, both through disruptions to supply chains stemming from the first rounds of infection in Asia and government-imposed restrictions on individuals, businesses, and corporations alike. The former directly affects cargo port volumes, while the latter affects the broader global consumer demand that drives the Port of Melbourne's imports and exports. Economic effects of the coronavirus will generate throughput declines along with financial stresses well in excess of what Fitch expects under typical recessionary conditions. The normalised EBITDA margin level for 1HFY20 saw a slight reduction relative to FY19 and the prior corresponding period. This is due mainly to the weaker trade revenue and a small increase in operating costs. Against our 2019 rating case, revenue in FY19 was 1% below our expectations and FY19 EBITDA was broadly in line (AUD511.7 million versus rating case of AUD513.2 million) as costs were approximately AUD5 million below the rating case forecast. FINANCIAL ANALYSIS Fitch developed two primary scenarios that serve as the basis for its review of the Port of Melbourne. Our rating case scenario contemplates port revenue declines of around 10% in 2020, as a result of pandemic-related disruptions, with contractual minimum annual guarantees (MAGs) used as a floor for revenue. It is expected that revenue will remain depressed in 2021, slightly below 2019 levels. Thereafter, revenue growth rates will mirror our prior rating-case growth rates off the lower revenue base and not reach 2019 levels until 2022. For cargo, 1H20 assumes overall volume declines of 15%, which reflects coronavirus shutdowns and blank sailings in the February-March timeframe on top of normal lunar new year seasonal declines in transpacific cargo, followed by continuing declines of 20% through June due to softening demand as the virus slows activity in western consumer markets. 2H20 reflects a decline of 7% yoy, recognising the already low base in 2H19 from overall lessened demand. Fitch's more severe sensitivity case assumes a more severe volume decline of 20% in 1H20, and a further drop of 15% in 2H20, reflecting a more prolonged period of shutdowns and economic impact. Under this scenario, volumes in 2021 remain 5% below 2019 levels. 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 ESG issues are credit neutral or have only a minimal credit impact on the entity(ies), either due to their nature or 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. Lonsdale Finance Pty Ltd; Long Term Issuer Default Rating; Affirmed; BBB; RO:Sta Contacts: Primary Rating Analyst James Hodges, Associate Director +61 2 8256 0377 Fitch Australia Pty Ltd Level 15 77 King Street Sydney NSW 2000 Secondary Rating Analyst David Cook, Director +61 2 8256 0363 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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