Fitch Assigns Lonsdale Finance First-Time 'BBB'; Stable Outlook

(The following statement was released by the rating agency) Fitch Ratings-Sydney/New York/Singapore-April 23: Fitch Ratings has assigned Lonsdale Finance Pty Ltd a First-Time Long Term Issuer Default Rating (IDR) of 'BBB'. The Outlook is Stable. Lonsdale Finance is the issuing entity for the Port of Melbourne. The rating reflects 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 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, non-amortising profile, high gearing and considerable refinancing risk constrain its rating. KEY RATING DRIVERS Primary Port of Call - Revenue Risk (Volume): Stronger Port of Melbourne is one of Australia's largest container ports by throughput, handling 2.7 million twenty-foot equivalent units (TEU) in the financial year ending June-2017 (FY17). This accounted for 36% of Australian container traffic. The facility has 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 due to access limitations imposed by the Yarra River and Westgate Bridge. The port is located 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. Shipping lines have little ability to redirect cargo on an on-going 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 post-2037 (at the latest), allowing rises higher 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 CPI plus 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 The port benefits from a recent redevelopment of one of its major precincts, Webb Dock, including development of a third container terminal, one of the most advanced in the world with a high degree of automation. The terminal is not yet at full capacity and will ramp up over the next five years; therefore, short-term capex requirements are limited to minor maintenance of less than AUD100 million per year. The port's limited ability to handle large container ships at terminals along the Yarra River restricts ships approaching 10,000 TEU to Webb Dock. This could affect the port's competitive position, although external analysis has shown that Webb Dock may be able to accommodate vessels up to 14,000 TEUs subject to channel upgrades and investments in swing basins and berth capacity. Upcoming Bullet Maturities - Debt Structure: Midrange Lonsdale Finance's debt structure, while mostly senior in priority, is characterised by considerable refinance risk, exclusive use of bullet maturities and a back-loaded profile with a debt balance that increases over time due to growth capex. 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 (about 85%), with hedging in place for the remainder; total hedging based on existing drawn term debt is around 83%. 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 refinance risk. Financial Profile: Fitch's base case added a 1% premium to management's expected borrowing costs. This results in average net debt/EBITDA of 8.5x over the next five years; dropping from 9.5x in 2017 to 7.7x in 2022 due to higher 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, which tempers volume growth, increases operating costs and applies a 2% premium to forecast borrowing costs, resulting in an average net debt/EBITDA of 8.7x over the next five years, falling to just under 8.0x by 2022. PEER GROUP Key peers include the Australian coal port Adani Abbot Point Terminal Pty Ltd (AAPT) and British port group, ABP. AAPT shares Port of Melbourne's 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 8.2x, yet AAPT lenders benefit from a stronger covenant package, including a debt-service reserve account. AAPT is significantly exposed to volatile commodities, as it is solely used for coal exports, while Port of Melbourne has a more diverse throughput with minimal commodity exposure. Similarly to Port of Melbourne, ABP has a diverse throughput mix and functions as the port landlord, albeit for multiple port locations, removing both groups from significant operational risk. US based Port of Houston Authority (TX) (AA/Stable) is a similarly diverse port, with a stronger assessment for volume, price and infrastructure renewal, as with Port of Melbourne. The ports differ in terms of debt structure, where Port of Houston's IDR reflects an absence of revenue-backed debt and capital improvements thus far having been funded via ad-valorem taxes and excess cash flow from operations, supporting its higher rating. RATING SENSITIVITIES Future Developments that May, Individually or Collectively, Lead to Negative Rating Action: -Weak financial performance due to lower volume, 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. TRANSACTION SUMMARY The Lonsdale consortium of investors was awarded a 50-year lease for the Port of Melbourne in 2016 for AUD9.7 billion following a competitive bidding process. The consortium is made up of funds and clients managed by Global Infrastructure Partners, OMERS and QIC, all experienced infrastructure investors, with the port held under a stapled trust structure. More than AUD4.2 billion of bank debt was raised as part of the acquisition financing, with the first maturity due in October 2019, which Fitch expects to be refinanced through the capital markets. Fitch Cases Fitch's base case assumes a CAGR for containers of 4.8% over the next five years, in part driven by planned construction in the Melbourne area during that timeframe. Longer term, container growth averages at 3.9% per year through 2037. We forecast more modest growth for motor vehicles and liquid, dry and break bulk. Management forecasts are adopted for capex and opex, while a 1% premium is added to management's expected borrowing costs. The base case results in average net debt/EBITDA of 8.5x over the next five years; dropping from 9.5x in 2017 to 7.7x in 2022 and averaging at 7.3x through to 2037. The lower leverage is driven by steadily increasing EBITDA through the forecast period rather than debt paydown, given the non-amortising debt structure. In the rating case, Fitch applied a 50% growth haircut in 2020-2022 to the two largest volume lines to reflect a softer volume uptick from planned construction activities; from 2022, volume growth is reduced to 2.7% for all lines, in line with Fitch's GDP expectations. A 5% premium is applied to all opex and capex and a 2% premium is added to management's forecasted borrowing cost. The lower volume forecast compared with the base case negates the need for much of the expansion capex, which was assumed to be partly debt funded, resulting in lower leverage. This sees forecast net debt/EBITDA decline to 5.6x in 2037, from 9.5x in 2017, resulting in an average of 8.7x through 2022 and 7.2x through 2037. The initial leverage of 9.5x is high, but the quick drop to less than 8.0x in 2022 supports the 'BBB' rating. Asset Description The Port of Melbourne is one of Australia's largest container ports, located in the centre of Victoria's capital city of Melbourne, the country's second-most populous city. It handles more than a third of Australia's capital-city container trade and has a diverse mix of import and export cargo, including general and containerised cargo, liquid bulk, dry bulk and motor vehicles. Contact: Primary Analyst David Cook Director +61 282 560 363 Fitch Australia Pty Ltd Level 15, 77 King Street Sydney NSW 2000 Secondary Analyst Emma Griffith Senior Director +1 212 908 9124 Committee Chairperson Chad Lewis Senior Director +1 212 908 0886 Media Relations: Sandro Scenga, New York, Tel: +1 212-908-0278, Email: sandro.scenga@fitchratings.com; Leslie Tan, Singapore, Tel: +65 67 96 7234, Email: leslie.tan@fitchratings.com. 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