Fitch Ratings has affirmed the following ratings for Autoridad del Canal de Panama (ACP):
–Long-Term Issuer Default Rating (IDR) at ‘A’;
–USD450 million senior unsecured notes at ‘A’.
The Rating Outlook is Stable.
The ratings reflect ACP’s solid revenue profile and low leverage levels. The Panama Canal offers unique connectivity to world maritime trade. Its resilience to economic downturns, solid competitive position supported by the canal’s capacity post-expansion, and diversified revenue sources coupled with its robust toll-setting ability constitute strong rating drivers. Maximum projected net leverage at 1.5x in Fitch’s rating case is considered low according to applicable criteria for its rating category. The strategic importance of ACP and the legal framework that provides the entity with autonomy allow for the credit to be rated higher than Panama’s Sovereign rating, but is capped at three notches above it. ACP does not have direct peers, but compares favorably with other rated large intermodal transportation entities.
KEY RATING DRIVERS
Strong Strategic Asset for Global Trade Flows: The Panama Canal is a key player in global trade as it has a privileged geographical position. Approximately 2.4% of the world maritime commerce transits the Panama Canal. The Canal offers a unique connectivity to world maritime trade, linking two oceans, ports, rails and ancillary services adding value as the main transhipment hub in the region.
Legal Framework Support ACP’s Autonomy: Constitutional and legal framework supports operational autonomy. ACP is the entity of the Panamanian Nation established under the Constitution with exclusive charge of operation, management, and modernization of the Canal. Fitch considers as credit positive the moderate reliance of the government of Panama on ACP’s financial contribution as it represents approximately 2% of GDP. Fitch believes ACP will continue generating dividends and fees to the National Treasury of Panama. Moreover, the risk of government interference is adequately mitigated by ACP’s institutional autonomy, and incentives are aligned to maintain the Panama Canal as a profitable entity. The rating incorporates ACP’s long track record of managing profitable operations through different governments. Moreover, the rating reflects expectations that the Canal will continue to be managed under the same legal framework.
Revenue Risk – Volume: Stronger
Established Transport Asset in Competitive Region: ACP’s operations have demonstrated resilience through global economic downturn periods. The revenue mix is exposed to global trade fluctuations and competitive forces, leading to a degree of volume volatility. The tonnage using the canal is also subject to maritime industry changes (size of vessels) and competition from alternative routes. Still, the canal provides unique connectivity and time savings to world maritime trade. The main route for the Panama Canal in terms of revenues is Asia-East Coast USA, which represented 39% of total toll revenues as of September 2014. The main competitor serving the Asia-East Coast USA is the Suez Canal. Another competitor for this route is the intermodal USA system. Post expansion, the Panama Canal is expected to regain any market share it lost to the Suez Canal.
Revenue Risk – Price: Stronger
Robust Toll-Setting Flexibility: ACP has successfully demonstrated a toll structure that periodically changes to capture the changing dynamics of maritime industry. A proactive approach in adjusting tolls in accordance with varying types of maritime segment schedules has provided stable cash flow generation. Shipping line consolidation to improve margins coupled with U.S. intermodal transport alternative may pose challenges to the canal’s pricing flexibility.
Infrastructure Development/Renewal: Stronger
Big Ship Readiness and Modernizing Facilities: The expansion is expected to create economies of scale in maritime transport allowing 5,200-14,000 TEU vessels to use the new locks, up from current limit of 5,000 TEU capacity. With the USD5.4 billion major canal expansion, annual capital investments are expected to be back to historical asset replacement and upgrade levels in the intermediate term beginning with fiscal 2017.
Debt Structure: Midrange
Mixed Features: All of ACP’s debt is senior pari passu, has adequate covenants and there is no material exposure to refinancing risk as just a relatively small portion of total debt corresponding to the issued bonds is amortized through bullet payments. On the other hand, most of the debt accrues interest at variable rates, which translates into uncertainty with respect to future debt service obligations. The combination of stronger, midrange, and weaker characteristics results in an overall assessment of Midrange for this attribute.
Debt Structure assessment was modified to Midrange from Stronger to make it consistent with other rated transactions within Fitch’s portfolio.
ACP’s leverage is low for the rating category and should not increase significantly in the future. In Fitch’s base case, gross leverage is expected to reach its peak around 2x in 2016 and then decline to 1.5x by 2019, while net leverage remains stable at around 0.1x. In the rating case, gross leverage ratio is projected to increase to 2.5x, and net leverage to 1.5x, still in very comfortable levels for its rating category. Ratings are linked to Panama’s Sovereign ratings. and capped at three notches above it.
Among Fitch’s rated transport portfolio there is no direct comparison for the Panama Canal. However, ACP’s base case leverage, measured as net debt/EBITDA of 1.9x compares favorably with other large intermodal transportation entities such as: Harbor Department of Los Angeles (‘AA’/Stable Outlook), Port Of Long Beach (‘AA’/Stable Outlook) and McAllen International Toll Bridge system (‘A’/Stable Outlook) which have net debt/EBITDA of 2.1x, 2.2x and 2.3x, respectively.
Positive: A combination of ACP’s financial performance according to base case expectations and a positive rating action to the Sovereign rating of Panama may result in a positive rating action.
Negative: A negative rating action on the Sovereign rating of Panama.
Negative: Although unlikely given current leverage, significant and sustainable deterioration in the company’s credit metrics (margins, liquidity, and financial leverage) due to weaker than expected macro and business environment and/or more aggressive levels of capital investments or leverage could lead to a negative rating action. Moreover, a notable change in ACP’s autonomy or operational ties with the government through adjustments to the legal framework could impact the rating.
SUMMARY OF CREDIT
The project for the design and construction of the third set of locks, the primary component of the canal expansion, was completed on June 26, 2016 with a small delay, as the target date was April 1, 2016. The delay was due to several factors such as contractor organizational issues mainly at the beginning of the work, contractor delays during the design and testing of concrete mixes, and unilateral temporary suspension of the work, among others.
In addition, in August 2015, water seepage was detected in one of the concrete sills of the new locks at the Pacific site (Cocoli). According to management, the seepage was due to a design flaw that has already been corrected. Grupo Unidos por el Canal, S.A. (GUPCSA) is the consortium responsible for the design and construction of the third set of locks. GUPSCA has filed numerous claims against ACP regarding this and other disputes related to the canal expansion. The outstanding claims are not expected to materially impact the financial position or the operations of ACP.
The third bridge across the canal on the Atlantic side is still under construction. The work began in January 2013 and is anticipated to be completed in 2017. Nonetheless, the construction of this bridge does not interfere with the canal’s operations and has minimal impact in the project’s financials.
On April 1, 2016, the anticipated opening date for commercial operations of the third set of locks, ACP implemented a new toll scheme. The new tolls are based on the expectation there will be fewer crossings in the canal but volume will increase because of the capacity of the New Panamax vessels and LNG tankers that can use it. This price strategy is expected to contribute to revenue maximization.
ACP’s current liquidity, measured as non-restricted cash and marketable securities as of June 30, 2016 is USD 2.3 billion, which provides the company with comfortable liquidity headroom. Current liquidity is sufficient to meet the next debt payment of USD230 million due in 2019. According to the metrics reported by ACP as of June 2016, total debt to EBITDA and debt service coverage ratio are strong at 2.05x and 91.06x, respectively. As of June 30, 2016, ACP had USD2.75 billion of total debt, and net leverage ratio and total debt to EBITDA were 0.28x and 2.04x, respectively.