Rating Action: Moody's upgrades NCSP's rating to Ba1; stable outlook
Global Credit Research - 03 Sep 2020
London, 03 September 2020 -- Moody's Investors Service ("Moody's") has today upgraded to Ba1 from Ba2 the corporate family rating and to Ba1-PD from Ba2-PD the probability of default rating of Novorossiysk Commercial Sea Port, PJSC (NCSP) the largest operator of marine port terminals in Russia. The outlook on all ratings is stable. Concurrently, Moody's has upgraded NCSP's baseline credit assessment (BCA) to ba1 from ba2.
Today's upgrade of NCSP's ratings reflects the stabilised shareholding structure with the higher-rated Transneft, PJSC (Transneft, Baa2 stable) as the company's controlling parent, and reduced corporate governance risks following the approval of a new development strategy, which remains prudent under the new ownership. Moody's also expects NCSP to preserve its strong standalone credit profile, despite the unprecedented pressure on its operations from the coronavirus pandemic, which the agency regards as a social risk under its environmental, social and governance (ESG) framework, given the substantial implications for public health and safety.
Transneft acquired the controlling stake in the company in October 2018, thus eliminating the long-standing uncertainty over the shareholding structure, that historically weighed on its credit profile. NCSP's credit profile also benefits from having the higher-rated state-owned entity -- and a major operating counterparty -- as its controlling shareholder. As the monopoly owner of the country's oil and oil products pipeline system, to which NCSP has a well-established connection, Transneft contributes to the port's operational stability by mitigating risks arising from its high product concentration in crude oil and oil products. NCSP's ports in Novorossiysk and Primorsk, are also key destinations for Transneft's shipments of crude oil for export. As a result, the control over the company is important for Transneft, which allows it to ensure a proper development of the port's oil and petroleum products facilities and minimise the risk of disruption to its day-to-day operations.
The announcement of the new development programme in 2020 also materially reduced the uncertainties over the ongoing integration of NCSP into Transneft, including corporate governance considerations, and reinstated the company's prudent approach to operating and financial strategies, which is supportive to the company's standalone business profile and credit quality. In particular, NCSP has accelerated the expansion and modernisation of its port facilities in the largest Novorossiysk port with a primary focus on developing more profitable non-oil cargoes, which are non-core to Transneft, to grow its cargo base and ensure greater business diversification. Overall, NCSP plans to invest around RUB108.4 billion until 2029, of which (1) RUB63.3 billion will be spent for reconstruction and modernization of the existing facilities; and (2) RUB45.1 billion for the development of new port facilities with total capacity of up to 21.8 million tonnes including the construction of a large terminal for dry bulk and general cargoes as well as new terminals for containers, fertilisers, and vegetable oil.
Despite the significant step-up in capital spending, on the one hand, and, the economic and global trade disruptions caused by the coronavirus pandemic, which will strain NCSP's operating performance in 2020, on the other, Moody's expects the company to maintain its strong standalone credit profile in the next 12-18 months.
The rapid and widening spread of the coronavirus pandemic, the deteriorating global economic outlook, falling oil prices, and asset price declines are creating a severe and extensive credit shock across many sectors, regions and markets. The combined credit effects of these developments are unprecedented. Transportation, including port services, is among the sectors that face the greatest earnings pressure globally and in Russia, given its sensitivity to consumer demand and business activities. Although the corresponding rouble depreciation has provided some support to export operations, the global commodity market disruptions, including the drop in oil demand and production cuts by Russian oil companies under the new OPEC+ deal, will reduce NCSP's turnover, which may fall by around 15% in 2020 (including the impact of the grain terminal sale in May 2019) before it gradually recovers over 2021-22.
At the same time, the weaker rouble will help NCSP preserve its strong profitability through the crisis given that most of its costs are denominated in roubles, while around 70% of its total revenue is linked to US dollars. The company's focus on enhancing its operating efficiencies and tight cost control, along with expansion of higher-margin bulk cargoes, will further support its adjusted EBITDA margin, which will likely remain comfortably above 65%.
While the company's expansion projects will largely be debt-funded with investments peaking in 2021-24, NCSP will also retain flexibility in adjusting its capital spending plan with the final decision on each project to be made based on market conditions and availability of financing. In addition, although NCSP significantly increased its dividend payouts after Transneft acquired the port, including RUB26 billion to be paid in 2020, these extraordinary dividends will be fully covered by available cash proceeds of RUB35.8 billion from the grain terminal sale. Dividends are also likely to moderate starting 2021 under NCSP's dividend policy, which Moody's considers fairly prudent given its linkage to the company's available free cash flow.
As a result, Moody's expects NCSP's financial metrics to remain sound in 2020-21, with adjusted funds from operations (FFO)/debt remaining well above 25% and adjusted debt/EBITDA staying below 2.5x, although still subject to uncertainties around the evolution of the pandemic and the global economic outlook. The agency also notes NCSP's lack of a track record of consistent adherence to a balanced financial policy, which, in particular, includes NCSP's commitment to maintain its reported net debt/EBITDA below 3.0x through investment and industry cycles. At the same time, NCSP's credit profile is further supported by the comfortable capacity for some increase in leverage under NCSP's current rating (for the 12 months that ended 31 March 2020, its adjusted FFO/debt remained at 44%) as well as strong credit metrics and liquidity of the parent company, Transneft, with adjusted debt/EBITDA of 1.7x as of 31 March 2020.
The rating continues to reflect NCSP's position as Russia's largest multi-cargo seaport operator, with a favourable geographical location and well-developed connecting infrastructure. At the same time, the rating remains constrained by its high product concentration in competitive crude oil, which is, however, partly offset by its gradual diversification into oil products and more profitable general and dry bulk cargoes. Although NCSP's focus on export commodities mitigates its exposure to Russia's volatile operating environment, the company is exposed to the evolving regulatory and legal environment in the country.
NCSP will maintain sound liquidity over at least the next 12 months to be supported by its (1) large cash balance after the sale of the grain terminal with around RUB34.8 billion available as of 30 June 2020; (2) comfortable debt-maturity profile, with an annual debt repayment requirement of around $200 million; (3) fairly flexible investment plan; and (4) prudent dividend policy. Although the company does not have any committed credit facilities available, it should be able to easily secure external funding including for the financing of its expansion projects, given its strong business profile and Transneft as the majority owner.
Because the Russian government owns a 20% stake in NCSP and a "golden share", Moody's applies its Government-Related Issuers methodology. The Ba1 corporate family rating reflects a combination of (1) a BCA of ba1; (2) Russia's Baa3 foreign currency rating with a stable outlook; (3) the moderate default dependence between NCSP and the government; and (4) the low probability of government support in the event of financial distress.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
The stable outlook on NCSP's rating reflects Moody's expectation that in the next 12-18 months the company will maintain its sound credit profile with the risks related to the evolving pressure from the pandemic and the planned step-up in investments mitigated by the current leverage capacity, some flexibility in its dividends and development programme, and benefits from being part of a large state-owned entity, Transneft.
There is a room for a positive pressure on the rating given the company's strong credit metrics and supportive controlling shareholder. NCSP's rating could be upgraded if the company were to build a track record of consistent adherence to effective and transparent corporate governance and conservative financial policies, demonstrate an efficient implementation of its development programme, while preserving a strong market position in Russia and solid financial profile with adjusted funds from operations (FFO)/debt above 25%, and healthy liquidity at all times, including during an active investment phase.
NCSP's rating could be downgraded if its liquidity and financial profiles deteriorate materially, with adjusted FFO/debt declining towards 15% on a sustained basis as a result of (1) a weakening in the company's market position and deterioration in its operating performance, and (2) an aggressive investment programme or shareholder distributions.
The methodologies used in these ratings were Privately Managed Port Companies published in September 2016 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1040210, and Government-Related Issuers Methodology published in February 2020 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1186207. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of these methodologies.
Novorossiysk Commercial Sea Port, PJSC (NCSP) is the largest operator of marine port terminals in Russia and the third-largest in Europe by volume. NCSP operates two key ports: (1) the port of Novorossiysk, located in the Black Sea basin; and (2) the Primorsk Trade Port, in the Baltic Sea basin. For the 12 months that ended 31 March 2020, NCSP generated revenue of $827 million and adjusted EBITDA of $642 million. The controlling shareholder of NCSP is Transneft, PJSC (Transneft, Baa2 stable), with a 62% share, while the Government of Russia (Baa3 stable) owns a 20% stake in the company and a golden share.
For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.
The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.
These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.
Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.
Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.
At least one ESG consideration was material to the credit rating action(s) announced and described above.
Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.
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Ekaterina Lipatova Vice President - Senior Analyst Corporate Finance Group Moody's Investors Service Limited, Russian Branch 7th floor, Four Winds Plaza 21 1st Tverskaya-Yamskaya St. Moscow 125047 Russia JOURNALISTS: 44 20 7772 5456 Client Service: 44 20 7772 5454 Victoria Maisuradze Associate Managing Director Corporate Finance Group JOURNALISTS: 44 20 7772 5456 Client Service: 44 20 7772 5454 Releasing Office: Moody's Investors Service Ltd. One Canada Square Canary Wharf London E14 5FA United Kingdom JOURNALISTS: 44 20 7772 5456 Client Service: 44 20 7772 5454
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