RATING METHODOLOGY PrivatelyManaged Port Companiesweb.dpworld.com/wp-content/uploads/2014/05/... ·...

RATING METHODOLOGY

INFRASTRUCTURE MAY 31, 2013

Table of Contents:

SUMMARY 1 ABOUT THE RATED UNIVERSE 3 OUTLIERS 4 ABOUT THIS RATING METHODOLOGY 5 2. MEASUREMENT OR ESTIMATION OF THE GRID FACTORS OR SUB-FACTORS 6 DISCUSSION OF THE GRID FACTORS 8 FACTOR #1: MARKET POSITION 9 FACTOR #2: DIVERSITY OF CUSTOMER BASE 13 FACTOR #3: CAPITAL PROGRAMME, MANAGEMENT ATTITUDE TO RISK AND FINANCIAL PROFILE 15 FACTOR #4: NATURE OF ASSET OWNERSHIP 20 FACTOR #5: KEY CREDIT METRICS 21 STRUCTURAL CONSIDERATIONS AND SOURCES OF RATING UPLIFT FROM CREDITOR PROTECTION 24 ASSUMPTIONS AND LIMITATIONS, AND RATING CONSIDERATIONS THAT ARE NOT COVERED IN THE GRID 26 OTHER RATING CONSIDERATIONS 27 MOODY’S RELATED RESEARCH 28 APPENDIX 1 – PRIVATELY OWNED PORTS METHODOLOGY FACTOR GRID 29

Analyst Contacts:

LONDON +44.20.7772.5454

Paul Lund +44.20.7772.1955 Vice President - Senior Credit Officer [email protected]

Andrew Blease +44.20.7772.5541 Senior Vice President [email protected]

>>contacts continued on the last page

Privately Managed Port Companies

Summary

This rating methodology provides detailed rating guidance regarding Moody’s global approach to rating privately managed ports around the world. Local government owned and financed ports are rated according to the companion Rating Methodology for those credits. In particular this document outlines the key analytical factors that underpin ratings assigned to both port owning and port operating companies, and provides guidance as to how Moody’s combines each of these factors to arrive at a final rating outcome.

This methodology applies to the following companies:

» Publicly listed or investor owned port landlord and/or operating companies.

» Publicly listed or investor owned port companies operating concessions at government owned ports.

» International port operating companies which are wholly or partially government owned.

» Government-owned port companies with independent management.

Port companies, whilst simple in concept, provide a wide range of services to global and regional trade, and provide an irreplaceable interface between sea and land transportation. While ports have been enablers of economic growth throughout history, port operations have changed considerably over the last 50 years, with high levels of automation and the ability to dock ever increasing size and complexity of vessel.

As with other long-term infrastructure assets, such as airports and toll-roads, ports require a reasonable degree of renewal and upgrade to ensure that they are able to meet capacity demands over time. However, irrespective of capital expenditure requirements, the geographical location of some ports means that size and depth restrictions cannot be overcome.

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RATING METHODOLOGY: PRIVATELY MANAGED PORT COMPANIES

Given their importance to national economies in supporting their GDP growth, ports are often government owned (or have protected status), can be regulated, and may be supported by governments by either explicit (eg financial) or implicit (eg construction of related infrastructure) means. Ports covered by this methodology may benefit from these types of support and where there is a degree of government ownership this will be recognized through the use of Moody’s Government Related Issuers (GRI) methodology.

Port companies differ mainly in terms of size and ownership. However, many port companies are funded on a corporate basis. This new methodology is designed to cover both port owners and port operating companies, which have somewhat differing cash flow profiles. However, the majority of ports that we rate have the integrated owner and operator model.

This document includes a detailed rating grid and illustrative mapping of each rated company against the factors in the grid. The purpose of the rating grid is to provide a reference tool that can be used by investors, issuers and intermediaries to approximate credit profiles across the ports sector. The grid provides summarized guidance for the factors that are generally the most important for assigning ratings to Port Owning and Operating companies. Our illustrative mapping uses historical results, while our ratings also include forward-looking expectations. As a result, the grid-indicated rating should not be expected to exactly match the actual rating of each company.

The rating methodology is not intended to be an exhaustive discussion of the factors that our analysts consider in the ratings for this sector. We note that our analysis for ratings in this sector covers factors that are common across all industries (such as ownership, management, liquidity, corporate legal structure, corporate governance) as well as factors that can be meaningful on a company specific basis. Our ratings consider qualitative considerations and factors that do not lend themselves to a transparent presentation in grid format. The grid represents a compromise between greater complexity, which would result in a grid-indicated ratings that map more closely to actual ratings, and simplicity, which enhances a transparent presentation of the factors that are most important for ratings in this sector.

Privately managed ports rated by Moody’s are located around the world, with rated entities based in Europe, Dubai, Singapore and Australasia. The nature of ownership varies considerably, from ports 100% owned by a government, to fully privatised companies. The various ownership arrangements can lead to different business models, reflected in different funding and capital raising choices, all of which are accommodated by this rating methodology, with the exception of local government owned and financed ports.

For those issuers classified as a GRI, i.e. where a government ownership is material, we assign ratings in accordance with our methodology for GRIs . This rating methodology for privately-managed ports is used to determine the Baseline Credit Assessment (“BCA”) that we assign in accordance with our methodology for rating GRIs.1 Three of the currently rated privately-managed ports are GRIs, and reference to each GRI’s rating refers to the GRI’s BCA, before the benefit of government support has been factored into the rating.

In this rating methodology we discuss the five key rating factors that constitute our analytical framework for rating privately-managed port companies. In addition, once an analysis has resulted in a rating output from these factors, we consider certain features of a port company’s debt structure and

1 See Moody’s Rating Methodology: “Government-Related Issuers: Methodology Update”, July 2010,

http://www.moodys.com/viewresearchdoc.aspx?docid=PBC_126031

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determine whether any aspects provide additional ratings value. This is undertaken as a notching exercise, with certain structural and liquidity features providing ratings uplift.

The grid contains five key factors that are important in our assessments for the ratings of privately-managed ports:

1. Market Position

2. Diversity of Customer Base

3. Capital Programme, Management Attitude to Risk and Financial Profile

4. Nature of Asset Ownership

5. Key Credit Metrics

Each of these factors also encompasses a number of sub-factors or metrics, which we explain in detail.

The financial ratios shown in this paper use historic information for illustration, although our ratings also incorporate our expectation of future performance.

About the Rated Universe

Privately-managed ports are a relatively small rated sector globally, currently with fewer than 10 ports or port companies rated globally. These range from multinational investment grade global ports such as DP World, to single port owners. We are introducing this new methodology in order to accommodate companies which have previously been rated using a generic financing methodology, such as project finance, or no methodology.

We are seeing an increase in demand for ratings for port companies, and this methodology sets out a framework for port ratings going forward. The methodology is notably broad as we have needed to accommodate a wide variety of company size and structure. Publication of this new methodology will not lead to any changes for existing ratings.

Moody’s currently publicly rates seven privately-managed operating port companies, accounting for about USD6 billion of rated debt. Exhibit 1 contains a list of the privately-managed ports that are currently publicly rated. The exhibit shows the ratings (or BCA where an issuer is a GRI) and location. Of the issuers, one has a negative outlook, the others all have a stable outlook.

Four of the companies covered by this rating methodology are investor owned. The other three companies are classified by us as government-related issuers (GRIs). The ratings of these GRIs can be more transparently explained by four components: (1) the GRI’s standalone risk, as expressed by the baseline credit assessment (BCA) using a 21-point scale that ranges from aaa to c (similar to our credit rating scale except that all letters are in lower case); (2) the supporting government’s rating; (3) an estimate of the default correlation between the GRI and the government; and (4) an estimate of the likelihood of extraordinary government support to the GRI. We explain considerations for GRIs in more detail in the document: “Rating Methodology: Government-Related Issuers”, July 2010.

All illustrative mapping examples for the GRIs compare the grid score to each company’s BCA rather than its rating. Exhibit 1 contains a list of the companies, showing their ratings (as well as the BCA in the case of GRI), location, rated debt and amount.

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EXHIBIT 1

Publicly Rated Privately-managed Port Companies Grid Indicated vs Actual Ratings

Issuer/Entity Current Rating Outlook BCA Domicile

Grid Indicated

Rating Differential

to BCA

ABP Finance PLC (Associated British Ports)

Baa2 Stable - UK Baa3 -1

China Merchants Holdings International Co Ltd

Baa2 Negative - China Baa3 -1

DP World Limited Baa3 Stable baa3 UAE Baa2 +1

Hutchison Ports (UK) Finance plc

Baa1 Stable baa2 UK Baa3 -1

Novorossiysk Commercial Sea Port PJSC

Ba3 Stable ba3 Russia Baa3 +3

PSA Corporation Limited Aa1 Stable a2 Singapore A2 0

PSA International Pte. Ltd. Aa1 Stable a3 Singapore A3 0

Moody’s Investor Services

Outliers

Only one company, Novorossiysk Commercial SeaPort PJSC (NCSP), has a grid indicated rating which is substantially different to its current rating. Such a differential is not uncommon for Russia based issuers where the broader credit environment is less certain than in more credit-neutral countries.

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About This Rating Methodology

1. Identification and Discussion of the Grid Factors

The grid in this rating methodology focuses on six broad rating factors and weightings. Certain broad factors are comprised of two or more sub-factors:

EXHIBIT 2

Privately-managed Port Companies

Broad Rating Factors Factor

Weighting Rating Sub-Factors Sub Factor Weighting

1 - Market Position 25% a) Port size / number of ports owned 10%

b) Quality of Service Area and Connections 7.5%

c) Operational Restrictions 7.5%

2 - Diversity of customer base 10% a) Exposure to volume variation 5%

b) Dominance of Customers 5%

3 - Capital Programme, Management Attitude to Risk and Financial Profile

15% a) Complexity of Capital Expenditure Programme 5%

b) Management attitude to financial risk 5%

c) Proportion of Revenues from non-core activities 5%

4 - Nature of Asset Ownership 10% a) Ownership and Control of Assets 10%

5 - Key Credit Metrics 40% a) Cash Interest Coverage 10%

b) FFO / Debt 10%

c) Moody's DSCR 10%

d) RCF/Capex 10%

Total 100% 100%

The first four factors relate to the fundamental business characteristics of a port company, including its ability to attract cargoes and charge for them, its resilience to downturn and the ability of the ports to charge appropriate tariffs. The willingness to continue to invest and the nature of asset ownership are also major factors contributing to a credit quality of a port company.

The fifth factor comprises four key financial metrics which we will most commonly employ when examining port companies. In addition, the methodology also discusses how the rating of a port company can incorporate uplift from structural enhancements that achieve material debt holder protection as a mitigant to high debt leverage, or other legal or fixed governance features which achieve similar protections.

Each source of rating uplift is classified into three categories. The first category (contractual or legal features that cause a reduction in “event risk” – the risk that the management or owners will seek to change the business or financial profile of the issuer to significantly increase credit risk, is addressed through factor 3 (Capital Programme, Stability of Business and Financial Profile) because such features are an overlay upon the view of the management / owner’s (current or future) appetite for such risks. The other two categories of creditor protection, set out directly below, are incorporated by a final “rating notching” exercise, potentially moving a rating calculated from the factors up to reflect features which may reduce credit risk.

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The categories of creditor protection are:

1. Debt structure and liquidity protection

2. Control afforded to creditors

Due to the commonality of creditor protection features in the infrastructure finance markets, we have been able to employ the same categories of creditor protection and evaluation logic which we use in both our Operational Toll Roads rating methodology and Operational Airports methodology. This approach allows each methodology to cater for a spectrum of structures, from a simple corporate structure when no upward notching would apply, to a more constrained business model with reliable and explicit protections. This framework would in no way constrain a rating committee from assigning a rating significantly lower than the grid-indicated rating if circumstances warranted, say if management chose to maintain liquidity that was inadequate by normal corporate standards.

Whilst the rating factors described in this methodology cover the principal drivers of our ratings analysis, the analytical process also includes a number of important considerations that are consistently examined for fundamental issuers in general. Such factors include assessments which are difficult to define objectively such as an assessment of the management quality or the future impacts of current trends, and factors which are subject to overriding methodologies that impact all types of industries / sectors rated by Moody’s such as notching practices for debt subordination, overall frameworks for the impact of liquidity on issuers, and corporate governance and financial disclosure issues. Such issues are dealt with by us in the form of overriding rating methodologies and practices that are applied in accordance with general credit policy guidelines.

2. Measurement or Estimation of the Grid Factors or Sub-Factors

We explain our general approach for scoring each grid factor and sub-factor and show the weights used in the grid. We also provide a rationale for why each of these grid components is meaningful as a credit indicator. The information used in assessing factors and sub-factors is generally found in or calculated from information in company financial statements, derived from other observations, or estimated by Moody’s analysts.

Our ratings are forward-looking and reflect our expectations for future financial and operating performance. However, historical results are helpful to understand patterns and trends for a company’s performance as well as for peer comparisons. We utilize historical data (in most cases the last twelve months of reported results) in this document to more transparently illustrate the application of the rating grid. All of the quantitative financial metrics incorporate Moody’s standard adjustments to income statement, cash flow statement and balance sheet amounts for restructuring, impairment, off-balance sheet accounts, receivables securitisation programs, under-funded pension obligations, and recurring operating leases.

For definitions of our most common ratio terms please see “Moody’s Basic Definitions for Credit Statistics (User’s Guide)”, June 2011 (78480). For a description of our standard adjustments, please see “Rating Implementation Guidance - Moody's Approach to Global Standard Adjustments in the Analysis of Financial Statements for Non-Financial Corporations”, December 2010 (128137). These documents can be found at www.moodys.com under the Research and Ratings directory, in the Special Reports subdirectory.





http://www.moodys.com/

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In most cases, the illustrative examples in this document use historic financial data from a recent 12 month period. However, the factors in the grid can be assessed using various time periods. For example, rating committees may find it analytically useful to examine both historic and expected future performance for periods of several years or more.

3. Mapping Grid Factors to the Rating Categories

After estimating or calculating each sub-factor, the outcomes for each of the sub-factors are mapped to a broad Moody’s rating category (Aaa, Aa, A, Baa, Ba, B, Caa, or Ca).

4. Mapping Issuers to the Grid and Discussion of Grid Outliers

For each rating factor, we provide a table showing how each company maps to grid-indicated ratings for each rating factor and sub-factor. The weighted average of the sub-factor ratings produces a grid-indicated rating for each factor. We highlight companies whose grid-indicated performance on a specific sub-factor is two or more broad rating categories higher or lower than its actual rating and discuss general reasons for such positive and negative outliers for a particular sub-factor.

5. Assumptions and Limitations and Rating Considerations That Are Not Included in the Grid

This section discusses limitations in the use of the grid to map against actual ratings, some of the additional factors that are not included in the grid but can be important in determining ratings, and limitations and key assumptions that pertain to the overall rating methodology.

6. Determining the Overall Grid-Indicated Rating

The following table shows the Sub-factors that make up each factor, and the weighting attributed to each individual sub-factor (the rationale for these is set out in more detail below):

A further weighting is applied by rating category as shown in the table below:

Rating Category Aaa Aa A Baa Ba B Caa

Weighting 1 1 1 2 3 4 5

We weight the lower rating scores more heavily than the higher rating scores. The reason is twofold. In the first instance, we need to adjust for situations where an issuer exhibits weak characteristics across the first five Factors, which are not typically encountered within the rated universe and which require more demanding thresholds for the credit metrics. Secondly, we recognise that a serious weakness in one area often cannot be completely offset by a strength in another, and that the lack of flexibility normally associated with high degrees of leverage can heighten risk. An overweighting of the lower categories has been employed in other infrastructure rating methodologies, i.e. those for operational toll roads, operational airports outside of the United States and PFI/PPP projects.

We have adopted the same overweighting of certain lower rating categories in this rating methodology as is used for the non-US airport methodology. This reflects our view that in some cases, there are a number of single factors that could affect a port’s creditworthiness, such as the loss of a shipping route calling at a port, or issues with a large construction project.

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The mapping exercise outlined above produces a final distribution of scores by rating category (for example: 10% “Aa”, 30% “A”, 40% “Baa” and 20% “Ba”). Rating scores of lower than A are weighted higher than “1” so that the percentage allocations by rating category will incorporate these weighting allocations.

These percentage scores are then multiplied by a number which relates to each rating category in the table below:

Rating Category Aaa Aa A Baa Ba B Caa

Weighting 1 3 6 9 12 15 18

The resulting output is a numeric score ranging between 1 and 18, which is then mapped to an indicated rating.

Grid Indicated Rating

Grid-Indicated Rating Aggregate Weighted Total Factor Score Aaa x < 1.5

Aa1 1.5 ≤ x < 2.5

Aa2 2.5 ≤ x < 3.5

Aa3 3.5 ≤ x < 4.5

A1 4.5 ≤ x < 5.5

A2 5.5 ≤ x < 6.5

A3 6.5 ≤ x < 7.5

Baa1 7.5 ≤ x < 8.5

Baa2 8.5 ≤ x < 9.5

Baa3 9.5 ≤ x < 10.5

Ba1 10.5 ≤ x < 11.5

Ba2 11.5 ≤ x < 12.5

Ba3 12.5 ≤ x < 13.5

B1 13.5 ≤ x < 14.5

B2 14.5 ≤ x < 15.5

B3 15.5 ≤ x < 16.5

Caa1 16.5 ≤ x < 17.5

Caa2 17.5 ≤ x < 18.5

Caa3 18.5 ≤ x < 19.5

Ca x ≥ 19.5

Discussion of the Grid Factors

The indicated ratings for all issuers are either at the same level as their actual published rating, or within one notch of the same, with one exception. Looking at the universe of rated ports as a whole, this methodology is generally predictive of Moody’s view of the rank ordering of credit risk in the industry, as well as the absolute position of credit risk on Moody’s Global Rating Scale.

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We recognise that an issuer may be placed higher or lower in a given sub-factor than its final modeled rating. This reflects the relative strengths and weaknesses of an individual issuer on each of the sub-factors considered significant to the rating, but is not a major concern. Given the propensity for private sector infrastructure companies to use debt leverage to improve shareholder returns, it is possible for an issuer to score strongly on the fundamental business risk assessment sub-factors, and weakly on the Key Credit Metric sub-factors to achieve a rating somewhere between, i.e. there is a greater ability for sound businesses with long term visibility of cash flows to borrow.

This rating methodology is also intended to reflect how an issuer’s credit profile may change over time as certain aspects of its business consider change, such as acquisition or investment, that could significantly influence the rating.

Factor #1: Market Position

Why It Matters

The size and location of a port are, in our view, the most important qualitative factors when rating a port. There are two factors in particular that determine the strength of a port’s business risk profile – firstly the level of access that a port has to local economic activity to generate trade, be it demand-based or manufacturer-driven for export; Secondly the ability to access sea routes to support that trade.

The port industry has changed considerably over the last 50 years, as containerization of goods and the ever increasing costs of fuel have led to ship sizes increasing considerably. This has naturally led to smaller ports losing their ability to compete as they have been unable to accommodate the larger ships, or have strong enough connections to move the goods from the port.

Whilst ports could be viewed as monopoly infrastructure operations, they should also be viewed as logistical access points to market. Ports, in reality, do compete with each other when there are a number of ports serving the same market– shippers will look at the overall cost of moving goods between two points on the globe and usually go for the cheapest route. However, this will be restricted by the routes that major shipping lines operate. Major ports will compete to retain major routes, rather than receive feeder services.

Ultimately, however, ports will always have a certain element of monopoly power as there are relatively few locations that are big enough and geographically suited to accommodate a port, and the considerable expense of building a port from scratch mean that barriers to entry are very high.

How Do We Measure It?

a) Port Size or Number of Ports Owned Our scoring is based on the premise that a single large and well-diversified port could attract an investment-grade score. Most large single ports are diversified in terms of the spread of cargoes that they accept. We would expect an investment grade port would not have reliance on a particular shipper, and that the failure of any one shipper would lead to a modest drop in revenues, and could be readily replaced.

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Major port-owning companies, such as DP World, have a large number of international ports, servicing major shipping routes creating a good level of diversity and protecting it from regional downturns to an extent. Whilst the ownership of a large number of ports generally translates into a stronger score, this cannot be applied to the ownership of a number of minor ports, that in general, would not provide an adequate level of diversity to give the score some uplift.

The ports in question should have a strong track record of operation in order to provide any benefit to the ultimate rating. We have identified a large port as being one with at least one million TEU container movements per year, or the equivalent of around 30 million tonnes of throughput. Where port companies have a number of terminals, but some of these are in start up mode, we would discount the volumes of the new ports until they develop a strong track record.

b) Quality of Service Area and Connections A port’s connections with the surrounding economy, in terms of both the strength of the local economy and costs to serve, are very important in terms of its ability to move goods from sea into the centre of economic activity for imports, or completed goods out to export routes. This analysis also relates to the port’s position in relation to the major shipping routes – the closer a port is in steaming time from existing routes, the more likely it is that services will call. Hub ports, where some of the trade comes from feeder ports to be loaded onto larger vessels, create additional demand to make a call profitable. Where a port attracts the larger shipping lines, we have seen over time a relocation of distribution points closer to the port to shorten the routes of goods to shops and suppliers when on land.

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FACTOR 1

Market Position Weighting: 25%

Aaa Aa A Baa Ba B Caa Sub-Factor Weighting

Port Size / No. of Ports Owned

Very Strong geographic diversification - a large number of deep sea ports with many international routes. No single terminal makes up more than 20% of company's EBITDA

Between 5 and 10 ports with strong diversification of deep sea routes and broad range of cargos. No single port contributes more than 40% of group EBITDA. OR geographically concentrated port areas with very large volumes (>15 million TEUs or equivalent) and which have multiple terminals mitigating single site risk

Either a single terminal of more than 5 million TEUs/>100 million tons total cargoes, or up to five terminals with strong deep sea bias (>75% international trade)

Single port but with strong level of deep sea routes, OR a number of small ports all based in the same economic area with short sea operations. One million TEU container movements / 30 million tons bulk goods

Single large port with some deep sea route operations with weak but dominant operator that could significantly alter volumes

Modest single port with a variety of short sea services

Small port with dominant short sea operator / ferry and minor Marina services

10%

Quality of Service Area and Connections

Port forms an essential part of the local economy and has an effective monopoly on port services for the region, or is a major transshipment hub. Excellent road, rail and pipeline connections or strong positioning on major sea routes

Assets have very strong road and rail connections to highly populated areas / strong industrial areas with strong record of imports and exports. Within 50 miles of major city > 5million population

Assets have good road and rail connections to moderately strong economic areas

Assets have adequate connections or serve a modest economic area. Good road and rail links able to support significant volumes

Assets have limited connections to major centres, reliant on a limited local economy, OR the port is specifically built as an export route for commodity products e.g. Oil, Timber, Ore or Coal produced by a single concession or mine

Single route port - usually localised ro-ro operations

Port offers only small marina or local services

7.5%

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FACTOR 1

Market Position Weighting: 25%


Operational Restrictions

Port is able to accept any current type of ship including post- and superpost-panamax, and turnaround a number of these ships at once. No volume restrictions on the land side

Port able to accept any size of ship, but with limitations to the number of ships at any one time, either due to limited quay space or limited landside infrastructure, but with room to expand

Limitations on ship size to Post Panamax (8,000 TEUs) but with good capacity. Some limitations on operations of port (operating hours / landside infrastructure not scaled to port)

Multi modal but limited to short sea operations and feeder services. Able to accommodate up to Panamax only

Limited to short sea Ro-Ro with limited other forms of load and unload

Port specifically built for one type of vessel

Very restricted port able to take only small vessels

7.5%

In general, a major port will have at least dual-carriageway road connections as well as rail connections (where rail is a feature of the economy) and in many cases the ability to transship goods onto other vessels. We note that a number of significant ports are somewhat remote from the economic areas that they serve, with transit times of three hours or more. However, these limitations can be offset by existing patterns of trade flows, and the lack of competing ports close to the demand centres.

In general, a large port will have good access to a significant urban or manufacturing centre with a strong level of consumer or industrial demand. The considerations for a port’s location are most clearly defined for single product shipment.

c) Operational Restrictions The breadth of traffic serving a port will ultimately be restricted by the size and type of ship that can be accommodated in the port. For instance, a port with shallow approaches won’t be able to accommodate an ultra large crude carrier, or an ultra large container ship, which could have a draught of 14 metres (47 feet) or more. Similarly, the quays may not be long enough, and the port may not have the cranes, conveyor belts, pipes or storage tanks required to off- or on-load a wide variety of containerised or bulk products.

Over the past 25 years, whilst bulk carrying ships have remained more or less the same size, we have seen a considerable increase in the size of container ships, growing from about 4,000 TEUs to over 12,000 TEUs currently. The growth in ship size has not stopped, and the introduction of 18,000 TEUs ships from 2013 which have been adopted to increase fuel efficiency per container, require more ports to adapt both crane size, quay length and depth alongside to service them. The larger size of the ships puts a greater strain on a port as it may need to move over 3,000 containers per stopover, requiring five cranes to work for 24 hours to turn a ship around. Not all ports have this capacity, limiting the ability of smaller ports to compete for larger routes.

The ability of a port to service a ship once it has docked is an element that can be altered with significant investment. However, the ability to get a ship into port in the first place is restricted by the geography of the port, which may ultimately limit the long-term competitiveness of the port.

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Where we are rating a company which owns or operates a wide spread of ports, we will look at the ability of each port to service a broad range of ships in the locations that it serves. For instance, a company with a broad geographical spread of ports should be able to accept a wide variety of ships at most of its ports in order to score well. If 50% of its revenues came from ports which were able to accept any ship size, and 50% of revenues were driven by smaller ports, then we would weight the score appropriately. If a company’s ports are based in a single country, then we give credit to the range of ships that can be accommodated in aggregate.

Most of the port companies that we publicly rate as of May 2013 are reasonably large in terms of the overall tonnages of cargo, with the minimum score being Baa, equivalent to at least 1 million TEU containers or 30 million tonnes. However, in the future we expect to see a wider range of ports in terms of the quality of service area and connections and potentially more volatile cargo volumes. In general, all of the port companies that we rate have the ability to handle a diverse range of ships, although in some cases the size of ship is restricted either by man-made dock entrances, such as lock access, or the natural restrictions imposed by navigation.

Factor #2: Diversity of Customer Base

Why It Matters

The diversity of a port’s customer base is a strong pointer with regards to the expected stability of volumes going through a port. Generally the diversity of the customer base will overlap with the size and strength of a port’s service area, and the types of cargo that can be landed. With this factor we further analyse the dependency of the port’s revenues on a few customers – the higher the level of dependency, the more likely that a loss of a single customer will result in at least a material short-term reduction in the port’s revenues.

It should be noted, however, that this measure is distinct from the mix of cargoes, and a number of importers and exporters may make up the total volumes relating to a single commodity. Depending on a port’s location, its total cargoes may be mixed, with no particular dominance in terms of their overall contribution to revenue


a) Exposure to Volume Variation Moody’s analyses historical performance of the port to understand the actual sensitivity of revenues to year-on-year changes in volumes. In general, where the port company is also the landlord, about 50% of revenues are driven by non-volume related services. These types of revenue streams are typically lease or rental payments for the use of landside facilities (warehousing, storage, custom built facilities), pilotage (to guide ships into harbour), conservancy (to maintain the channels into port) and wharfage (the cost to a ship company of mooring a ship alongside the quay). These act as a strong mitigant to volume risks, as they are based on long-term commitments and ship movements rather than tonnage.

Volume related revenues are generally those which are uncontracted, although tariff agreements may be in place. Container traffic in particular demonstrates a relatively high degree of revenue sensitivity to volumes, as volumes are generally uncontracted. This revenue sensitivity is higher still where the port is a major container transshipment hub.

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Major mitigants to revenue sensitivity include long-term take or pay contracts, whereby the importer / exporter pays for a minimum level of tonnage, this limiting downside risk. The existence of landside facilities, such as oil refineries, petrochemical plants, distribution facilities and manufacturing plant will ensure that imports or exports driven by that facility will use the port, thus underpinning volumes. Ports with a higher proportion of contracted bulk services and landlord related revenue tend to have much lower revenue risk than container ports, and therefore stronger business risk.

b) Dominance of customers In this category we tend to differentiate the port’s ultimate customers from the actual shipping lines that call at the port, although there is clearly a three sided relationship between a port, the shippers and the shipping lines. With the exception of cruise operators, we tend to the view that the shipping lines themselves are not the primary port customers, although clearly the ability of the port to dock and unload a ship is of paramount importance, and a port must engage with the shipping lines if it is to attract the cargoes that they carry. This view is somewhat modified with regard to ports with large transshipment traffic, where it is generally the decision of the shipping line as to what port it uses for transshipment.

However, fundamentally a port’s customers are usually the importers and exporters that require bulk, break bulk, liquids or containers to be loaded onto or unloaded from the ships. The passage of cargo for smaller customers is generally organised by freight forwarding companies, who organise which ship the cargo will be loaded onto, the destination port and the uplift from the port to the final destination. In most cases this will be based on the lowest cost to transport the goods from the source to the destination.

Most of the larger ports will have a broad spread of customers. The largest customers tend to be importers and exporters of bulk such as coal, ores and wheat, which may move thousands of tonnes of product through the port. However, for larger ports, we would not expect individual shippers to exceed 10% of the port’s volumes, with a lower level of revenues.

A high level of exposure to a particular or a few customers, will mean that the port’s revenues are exposed both to the overall credit quality of that customer, or that volumes could be hugely affected in the event that a company were to close operations at that port. Single product ports in particular are very highly exposed to the withdrawal of the main operator, whether this is due to demand for the product or lack of supply close to the port. Examples of single operator type ports include coal and ore terminals, ferry ports and metal smelting facilities.

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FACTOR 2

Diversity of Customer Base Weighting: 10%


Exposure to volume variation

Revenues 100% supported by long-term take or pay contracts or substantially comprise fixed payments with no volume linkage. Mostly bulk or oil with significant landside commitment. Revenues include all conservancy and pilotage fees

Stable cargo throughput by tonnage with long-term take or pay contracts accounting for 80% of revenues. Limited uncontracted volumes or 80% or more of revenue comprises other substantially fixed payments

Limited exposure to volume variations - approximately 2/3 of revenues on take or pay contracts or comprises substantially fixed payments. Limited uncontracted volumes or 2/3 or more of revenue

Moderate exposure to volume variation, with approximately 50% of volumes contracted or comprises substantially fixed payments. High levels of container, and ro-ro traffic. High number of calls from major shipping lines, with strong container transshipment volumes

High exposure to volume variations - largely container based or similar uncontracted volumes. Regular line calls from large shipping companies

Very High levels of exposure to volume variation with very low level of contracts. Cargoes mostly container or RO-RO with historic linkage to GDP movement. Irregular calls by major shipping lines

Extremely unpredictable volumes. No regular calls from shipping lines

5%

Dominance of Customers

Top 10 customers should not exceed 5% of revenues


50% < Top 10 < 25%

Top 10 >50% Top 3 > 50% Single customer - port specifically built for one operation

5%

Factor #3: Capital Programme, Management Attitude to Risk and Financial Profile

Why It Matters

Although ports are major pieces of infrastructure, development capital expenditure is often only undertaken where the customer is willing to invest alongside the port or commit to a long-term contract to underpin the investment. This is generally the case with logistics facilities, bulk terminals and car import terminals to name a few. However, the huge growth in container-based cargo movements over the past 40 years, means that ports in general invest on a more speculative basis. The maturing of the container shipping industry has seen ships grow from the 3 to 4,000 TEUs Panamax container ships of the 1980s, to a new generation of ships able to take up to 18,000 TEUs, maximising the limits of height, draft and beam on the chosen routes. The prevailing high price of oil also maintains pressure on reducing the fuel cost per container, lowering steaming speeds to save fuel, with the inevitable boost in ship sizes to maintain capacity.

Existing container ports have to respond in order to protect the volumes, by ensuring that they can continue to attract the ships that operate the main routes. This can result in significant outlay on taller cranes with greater reach, as well as significant dredging operations to ensure that ships can lie alongside the quay in all states of tide when fully laden.

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We measure the size and complexity of the capital programme to understand its effect on the rated port company. Not only do we assess the financial impact on the company, but also the operational issues that could result from a poorly managed project which could result in significant additional cost beyond our expectations, and operational restrictions during the construction.

The generally stable and cash generative businesses of a major infrastructure entity, such as a port, creates significant capacity to incur debt financing and potentially invest in new infrastructure or other business activities. Moody’s understands that debt financing may be considered essential to the efficient capital structure of a port owned by the private sector.

A desire to enhance shareholder returns may make higher leverage more attractive, either directly or through opportunistic investments. Furthermore, sustained investments outside the ownership of the core port assets, which the management will know well, may undermine the quality of the cash flows generated by the ownership of the core port assets. Therefore, the way in which a port operator chooses to use its debt capacity, and the limitations to leverage and the pursuit of other activities, legal or contracted with debt holders, is considered a key credit issue.

Moody’s sees strong similarities between the propensity for some owners and management of port companies to invest outside of the core assets and to take on more debt, as we see for some airport owners / operators.

With this factor, we aim to identify the likelihood that current or future management action could add uncertainty to future cash flow levels, and divert resources away from creditors. Such decisions are a function of the ability and willingness of management and shareholders to change the business focus and the financial structure of the company. However, where covenants restrict certain types of behaviour, then we will give credit accordingly.


We look at the following three Sub-factors:

a) Size and Complexity of Capital Expenditure Programme Our starting assumption is that some of a port’s capital expenditure is spent on maintenance – we view 3% of revenues as being a reasonable minimum level to maintain equipment in good condition. If the port company spends less than this level on maintenance, then we may view this as a credit negative, as the potential for asset failure may have a negative impact on operational efficiency or operating costs in the future, which may also require more significant investment to correct.

Expansion capex will usually ultimately be credit positive for a company, as it leads to the creation of additional assets which will generate new cash flows in the long-term, following completion. However, we measure not only the expected annual financial commitment to growth, but also the expected additional risks that ensue, including construction liabilities, cost overrun risk, and operational risk created by new construction potentially interfering with the existing port operations.

Capital expenditure is scored by relative size of the programme, reflecting the fact that in general port construction is not usually politically sensitive, and that land is usually available for construction projects. Furthermore, the critical path for the construction of major port projects is generally broad, as many streams of work can be undertaken at the same time. “Caa” would be scored if construction of a transformational project is experiencing significant problems to the extent that it has, or is likely to have, a material adverse effect on port operations.

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The majority of the scoring in these Sub-factors will result from Moody’s interpretation of shareholder and management expectations. This will be a judgment predominantly made in the light of a review of past actions and after discussions with management as to their future strategy. However, a review of key legal documentation, by-laws, concessions or leases, and any relevant financial documentation that pertains to the majority of the issuer’s debt, may be undertaken where necessary to confirm any structural protections of the nature anticipated by the relevant Sub-factor.

Note that there is a distinction between the risk characteristics captured under this Factor 3 and those which may be captured in our calculations used in Factor 5: Key Credit Metrics. Under Factor 5 we assess an issuer’s historical and prospective financial profile based on its stated business plan and financial policies, and on our views of the main variables affecting future cash flow generation (e.g. revenues, costs, capital expenditure). Any specific transaction that an issuer is committed to or very likely to execute would be factored in to our financial projections. Conversely, under Factor 4, we assess the risk that future corporate activity, not identifiable yet, may alter an issuer’s current business and financial risk profile and the risk that current financial policies will be abandoned in pursuit of higher financial leverage.

b) Management Attitude to Financial Risk In this sub-factor we consider whether there are restrictions on management’s discretion to exploit an issuer’s cash flow to pursue opportunistic investments, business combinations, and other significant corporate initiatives that would alter the issuer’s credit profile. It also addresses the likelihood that an issuer may change its capital structure based on the degree of discretion left to management and shareholders, their strategy, and their track record. It is not intended to penalise issuers that may need to raise debt to fund capital expenditure programmes. In essence, we assess how future cash flows are likely to be applied, and what the balance will be between cash flows applied to repay debt creditors and those applied to make investments in order to bolster shareholder returns.

The best possible feature scored under this sub-factor (which we deem commensurate with the “Aaa” category) entails a prohibition on the issuer from engaging in any form of opportunistic corporate activity, either because of the specific mandate incorporated into legislation or other legal provision pertaining to the issuer, the issuers by-laws, or other binding agreements (e.g. a contract with a government). In addition, covenant restrictions in financing agreements may prohibit or limit debt raising for capex or acquisition.

c) Proportion of Revenues from Non-Core Activities This Sub-factor measures the quantity of risk that may derive from activities outside of those related directly to the port assets owned by the issuer. It is not intended to pick up investments in activities that are ancillary to the management and development of the port sites. It is intended to identify how exposed the issuer may be to businesses which will likely be riskier than the core owned port assets (e.g. investment in ports in other jurisdictions or other transport infrastructure or utility companies). Shareholders may conclude that returns may be enhanced by investing in such businesses, but given the relatively high credit quality of port assets, a significant dilution of this business risk is considered a negative credit event. This Sub-factor adjusts for the influence that contributions from higher-risk businesses may have on an issuer’s financial performance and credit metrics.

Issuers score either “Aaa” or “Aa” if they have some contractual, legal or governance framework that prohibits investments outside of the core owned port businesses.

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We will score all other situations “A” through to “Caa” depending on management’s appetite for investment in non-core businesses as measured in terms of the expected future proportion of revenues that may be earned from such investments (measured as a % of all revenues).

Within the rating grid, the lowest score is attributed to an issuer that is targeting to earn over 25% of its revenues from outside of its core port business. If the issuer targets substantially more than 25% of revenues from outside of its core business, the actual credit analysis of the issuer may require a “blended” approach of the different businesses to adequately assess the issuer’s consolidated credit profile, or may require that the issuer be rated as a conglomerate entity.

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Rating Mapping

FACTOR 3

Capital Programme, Management Attitude to Risk and Financial Profile Weighting: 15%

Aaa Aa A Baa Ba B Caa

Sub-factor

Weighting

Size and Complexity of Capital Expenditure Programme

No expansion capex planned - maintenance capex only (typically about 3% of revenues)

Annual expansion capex of up to 5% of revenues not including maintenance capex

Annual expansion capex of 5 -10% of revenues not including maintenance capex

Annual expansion capex of 10 to 15% revenues not including maintenance capex

Annual expansion capex of between 15% and 30% of revenues

Major expansion project sized at more than 30% of revenues. Likely to be a major port upgrade / re-profiling

Operational restrictions make operations difficult to sustain at current levels. Significant project that will completely change the profile of operations. >40% of revenues

5%

Management attitude to financial risk

Covenants prohibit all wider Corporate Activity OR Corporate Activity is outside of management mandate. No additional indebtedness allowed without debt holder’s consent

Covenants largely limit corporate activity, with the exception of certain defined permitted investments OR Legal status dictates that investment and related debt raising is restricted to capex for existing ports only

Strong track record of no material corporate activity and stated intention to refrain from M&A and /or major investments. Financial covenants in principal debt instruments limit management ability to materially increase leverage

Moderate risk of corporate activity which may impact credit metrics for 18-24 months only. Conservative financial strategy, unlikely to compromise minimum financial parameters

Track record of repetitive, sizeable transactions. Limited track record of consistent financial policies; likely to target high leverage

Highly likely to conduct frequent and very large opportunistic investments. Track record of aggressive financial policies and very high leverage; likely to pay out creditors' financial cushion ahead of business pressures

5%

Proportion of Revenues from Non-Core Activities

0% (Exclusive focus on core owned ports’ activity) OR Debt Covenants prohibit all other businesses

Up to 5% of revenues from non-core activities OR debt covenants largely prohibit all other businesses with the exception of certain defined and low risk permitted businesses

Between 5 and 10% of revenues from non-core activities OR debt covenants largely prohibit all other businesses with the exception of certain defined and low risk permitted businesses

Between 10 and 15% of revenues are generated by non-core activities. May be additional restrictions in debt covenants

Between 15 and 25% of revenues are generated by non-core business

>25%. A material proportion of revenues are generated by business which are not directly related to the operation of the port. These include shipping, freight forwarding, road haulage, and long-distance rail haulage

5%

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Factor #4: Nature of Asset Ownership

Why It Matters

The ownership of a port’s assets has a strong linkage to the breadth of revenue that the port company can earn from its assets. The nature of ownership in ports is very broad. The strongest position for ports is full ownership of the port assets and land, including rights extending to the seabed to the harbour entrance, which enhances the ability of the port to earn money from ships docking at other docks in the same harbour.

The nature of asset ownership helps determine the extent to which a port company can maximise the yield for its operational port area. It will also have an effect on the ability of creditors to maximise recovery in an event of default – i.e. for those companies which have full ownership of the dock assets with no legal limitation on the ability to pledge the assets to creditors.

If the port company operates a concession let by a Port Authority (often a public body) rather than owning the port asset, this could weigh more negatively on the rating as the creditors will have little ability to recover lending from the company, as the company may have already defaulted on the concession, effectively stopping revenues unless interim arrangements are in place. Furthermore, concessions tend to be time limited, and the window for repaying debt is finite which can limit credit quality. Ports where the company is also the landlord are generally funded on longer term basis, with bullet maturities.

Where a company owns a number of ports, we will weight our score according to the revenues generated by each ownership type. Companies which generate all of its revenues from freehold assets will be scored highly, whilst companies with revenues sourced mostly from concessions with some freehold will be receive a much lower score.


a) Ownership and Control of Assets This sub-factor specifically addresses the ultimate control that the management of the port company has over the assets that it operates. We ascribe the highest score where the company owns and has full, unlimited access to the assets. Ownership structures vary across the sector, some with limitations on the ownership of the ports by statute, preventing the assets being pledged to creditors.

Assets owned or held in perpetuity represent the highest quality of ownership, as it allows the port to impose charges on every activity that takes place within the boundaries of the port or its related navigation, helping the port to reduce the dependence of its revenues on volumes. In some cases, ports occupy land which is leased from the ultimate landlord. However, these leaseholds are generally very long-term (up to 100 years or more) and landlords tend to have no say over the operations of the ports.

We view ports with short-term concession agreements, or with tight operating covenants which leave little operational headroom before the concession terms are breached at the lower end of the risk spectrum. Whilst the strength of the concession agreement is an important factor, we also consider the track record of the grantor, and their likely behaviour in the event that the port breaches the conditions of the concession, which could either accelerate default or allow the port to continue operating if any breaches are waived.

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The sub-factor also takes into account the likelihood of a concession being renewed, and the track record of the grantor in holding open discussions and providing good levels of feedback during the concession negotiation.

Rating Mapping

FACTOR 4

Nature of Asset Ownership Weighting: 10%

Aaa Aa A Baa Ba B Caa Sub-factor Weighting

Ownership and Control of Assets

All key port assets held outright in perpetuity (freehold) and controlled by port management

All key assets controlled by port management and held under long term property leases with very limited Grantor termination rights

All key port assets controlled by port management and held under a Concession Agreement with finite life (albeit long-term) with limited Grantor termination rights (e.g. for insolvency only)

All key port assets controlled by port management and held under a Concession Agreement with a finite life. Grantor termination rights for under-performance or failure to meet certain financial parameters

Certain key assets held and managed by third parties (e.g. Stevedoring services, container / oil / bulk terminal operations etc.), others held in perpetuity, leased or under concession

Key assets held under a short term operating lease or licence type arrangement

The port is in default under a lease or concession likely to lead to the termination of that contract

10%

Factor #5: Key Credit Metrics

Why It Matters

The first four rating factors aim to capture the credit strengths and weaknesses afforded by the issuer’s fundamental business profile and financial policies. However, an issuer’s ultimate credit profile must also incorporate its financial profile.

When examining credit metrics, there is no single measure that determines credit quality. We utilise metrics that measure both the absolute capacity of the issuer to service its debt, and the size of its debt burden relative to those of its peers. Leverage ratios aim to capture different measures of how easily an issuer can repay its debt; coverage ratios focus more on the ability to service the debt prior to repayment, but also need to take into account the fact that the issuer may have an asset with a limited economic life such as a concession or lease of a fixed duration.


Due to the long-term nature of the assets, we have used very similar credit metrics to those used in assessing Operational Airports.

a) Cash Interest Coverage The formula for this interest coverage ratio is a variation on the FFO Interest Coverage used by Moody’s for many fundamental business sectors. The variation is the add-back of non-cash interest to interest expense for those issuers that have a material portion of their debt funding in the form of

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interest deferral instruments, such as zero-coupon, capital accretion or index-linked debt instruments (or have achieved a similar position through swap arrangements).

The calculation of the Cash Interest Coverage makes a distinction between current and accruing interest as this ratio is designed to capture the basic financial flexibility that an issuer has in meeting interest payments due on its debt. Other key credit metrics provide a comparable measure of an operator’s leverage and intrinsic ability to repay debt and are not affected by the use of non-conventional financing structures.

The formula for this ratio is as follows: FFO + Interest Expense Interest Expense – Non-Cash Interest

The numerator in the formula is FFO (which would be Cash Flow From Operations from the issuer’s financial statements adding back working capital movements) plus Interest Expense. Note that as calculated by Moody’s, FFO is net of the interest expense from the income statement, whether or not such interest expense translates fully into a cash payment, with adjustments made to issuers’ financial statements as necessary if non-cash interest is material.

The denominator in the formula is interest expense, based on the issuer’s reported figures, and incorporating our standard adjustments to interest expense (for example, re-classifying the interest component of operating lease rental expense). Interest expense is “gross”, i.e. before any deductions of interest income, as such amounts are already included within FFO. Where relevant, non-cash interest is added back (i.e. deducted from the Interest Expense figure).

b) FFO/ Debt The numerator in this ratio is FFO as defined above. The denominator is Moody’s calculation of debt, i.e. reported debt plus Moody’s adjustments (e.g. pensions, operating leases and other off-balance sheet adjustments).

We highlight that this ratio would not be affected by the use of non-conventional financing structures: where relevant, we make adjustments to FFO to achieve a “normalised” measure that reflects both cash interest paid and accrued interest.

c) Moody’s DSCR This ratio is a coverage ratio that aims to measure the amount of “headroom” afforded by the issuer’s cash flows in servicing and ultimately repaying its debt burden, capturing the limited life of an issuer’s cash-generating concession / lease.

This ratio is forward-looking in the sense that the denominator does not capture the actual debt service (interest plus principal due) reported by the issuer, but defines debt service as an assumed annuity – as such, this ratio aims to capture the issuer’s ability to service more “normalised” debt obligations, i.e. how debt repayment obligations would manifest themselves on average over the life of the concession / lease and assuming outstanding debt is fully repaid prior to expiry of the concession / lease.

Moody’s calculates a notional interest and principal payment for each year of the concession / lease, which is the total debt divided by the remaining term of the concession / lease plus the annual interest payment. This ratio enables us to differentiate two issuers with identical current cash flows and debt outstanding, but with different concession / lease lives. Under this formula, a shorter concession life

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yields a higher effective debt service requirement over each year of the remaining life of the concession / lease. Also, given the long-term funding horizon of a port issuer, this ratio allows us to reflect the need for future refinancing and compares differing amortisation profiles on a comparable basis. As such, we can better compare an issuer with bullet maturities in its capital structure with an issuer with partially or fully amortising debt.

For freehold ports, we assume that the company’s debt will amortise on a straight line basis for 100 years. Where the port company has multiple terminals which are a mixture of freehold and concession, we will weight the average life appropriately.

There are three key components to this ratio:

» FFO, as defined above.

» Interest expense, as defined above.

Debt Service Annuity, which is the annuity-type payment of interest and principal required to repay outstanding debt over the remaining life of the concession / lease.

The Debt Service Annuity is calculated using a standard formula that converts a present value (“PV”) into an annuity payment with no residual value at maturity. In other words, we assume that: (i) annual debt service is a constant figure, (ii) interest rates (the discount rate used in the formula) are constant, and (iii) the full amount of debt outstanding in the year of calculation (which represents the PV of future payments) is paid down to zero over the remaining life of the concession. Where assets are owned in perpetuity, we assume a 100 year annuity. The actual debt maturities on non-amortizing debt structures will be ignored for the purposes of the DSCR calculation, but will form part of our liquidity assessment.

The formula for the Debt Service Coverage Ratio is as follows:

FFO + Interest Expense Debt Service Annuity

d) RCF / Capex This ratio shows the extent to which a port operator is able to fund capital expenditure from internally generated funds. Moody’s does not regard capital expenditure undertaken by an operator to upgrade its network as a negative rating factor in itself, as additional investments may be remunerated through tariff increases or may generate additional traffic flows. However, we view positively the financial flexibility enjoyed by a port operator that faces only limited capex requirements easily funded by internally generated cash flows. Such a company would not need to access the markets to raise additional finance and may have a wider range of options to react to changing economic circumstances. We would caution, however, that a company that generates large financial surpluses that are paid out to shareholders may not actually retain a high degree of flexibility in downturns if management is unwilling to cut distributions.

The formula for the RCF/Capex ratio is the following:

(FFO – Dividends Paid) / Capex

where capex comprises additions to both tangible and intangible fixed assets.

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Rating Mapping

FACTOR 5

Key Credit Metrics Weighting: 40%

Aaa Aa A Baa Ba B Caa

Sub-factor

Weight

Cash Interest Coverage Over 8.0x

6.0x to 8.0x 4.5x to 6.0x 3.0x to 4.5x 2.25x to 3x 1.5x to 2.25x Less than 1.5x

10%

FFO/ Debt Over 40%

25% to 40% 15% to 25% 10% to 15% 6% to 10% 3% to 6% Less than 3% 10%

Moody's DSCR Over 8.0x

6.0x to 8.0x 4.5x to 6.0x 3.0x to 4.5x 2.0x to 3.0x 1.5x to 2.0x Less than 1.5x

10%

RCF / Capex Over 3.5X

2.5x to 3.5x 1.5x to 2.5x 1.0x to 1.5x 0.5x to 1.0x Less than 0.5x Less than 0.5x

10%

Structural Considerations and Sources of Rating Uplift from Creditor Protection

Issuers may be funded under different financing structures. Recently, some large transport infrastructure borrowers have become more highly leveraged as a result of changes in ownership and other corporate activity, and may have to agree to creditor protection arrangements as a way of mitigating this leverage.

Moody’s believes that in the transport infrastructure sector in general, and the port sector in particular, structural enhancements provided to debt creditors may allow a rating uplift when compared to the ratings of issuers that do not grant such protections. These factors were recognised and articulated within a debt rating framework in our operational toll roads rating and operational airports methodologies. Moody’s employs the same factors in the same way within this rating methodology. The defined sources of ratings uplift, their potential characteristics, and there measurement, are identical in all three methodologies and are as set out below.

We have classified the sources of rating uplift from creditor protection into three categories:

1. Event risk protection

2. Debt structure and liquidity protection

3. Control afforded to creditors

The first category is assessed as part of Factor #3. For the second and third categories, we look at specific concessions made to creditors and score their effectiveness. We consider all features that may fall within each category, assess them in the aggregate and assign one of five grades; “none”, “low”, “medium”, “high” and “very high”. Each grade is worth a fraction of, or a whole, rating notch (“none” = 0%, “low”= 25%, “medium” = 50%, “high” = 75% and “very high” = 100%).

However, it should be noted that debt structural features will be assessed in the context of the legal jurisdictions relevant to the issuer, as the value of certain contractual arrangements (e.g. security) may vary from jurisdiction to jurisdiction.

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i) Event Risk Protection In this category we review restrictive covenants including:

a. Restrictions on permitted business outside of core port operations.

b. Restrictions on acquisitions / disposals, possibly represented as a percentage of the asset base, actual size of acquisition or disposal, or contribution to EBITDA.

c. Restrictions on investments.

d. Restrictions on additional indebtedness.

As we have discussed in Rating Factor #3: Capital Programme, Management Attitude to Risk & Financial Structure” above, if these and similar restrictions are fully effective in removing event risk, all the sub-factors under Rating Factor #3 would be scored “Aaa”.

ii) Debt Structure and Liquidity Protection Structural enhancements in this category address financial risks associated with liquidity, interest rate and refinancing risk. Typical enhancements/structural features include:

a. Dedicated cash reserves to cover specific costs; for example Debt Service Reserve Accounts covering at least the next scheduled interest and principal payments, and, often, such payments for a period of 1 year.

b. Timing reserves to cover future “lumpy” payments (e.g. major maintenance).

c. No material refinancing risk (e.g. the benefits of an amortising debt structure).

d. Covenanted hedging policies.

The strength of these features will influence our assessment of the effectiveness of creditor protection in this category, depending on the specific circumstances of the issuer. We highlight that a fully amortising debt structure, usual in project financings but more rare in secured borrowing structures seen in airport and port companies, is generally seen as necessary to achieve a score of “very high” in this category.

iii) Control afforded to creditors Among the most typical structural features, financial covenants and security arrangements are included in this category, as they provide creditors with a degree of control over an issuer’s financial and business decisions when financial performance is below expectations. Specific arrangements that we classify in this category include:

a. Step-in rights and remedies to delay concession / lease termination or insolvency (e.g. direct agreements, security and inter-creditor agreements, information covenants etc.)

b. Restrictions on payments and distributions to shareholders, so called “distribution lock-ups” (which operate if certain credit metrics deteriorate below minimum required levels).

c. Frequent and regular reports of creditors’ technical advisers to sanction base case validity and compliance with contractual and financial obligations.

As for the category relating to debt structure and liquidity protection, the whole package of structural enhancements is assessed to gauge the overall effectiveness. For example, independent validation of

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compliance with financial ratio covenants may be an important consideration for the purpose of assessing the effectiveness of such covenants.2

Creditor step-in rights should be specifically permitted under the concession / lease or legal framework, as well as the finance documents. Note that we give value to security arrangements only as one element, albeit usually a critical element, of a wider package of features designed to improve creditors’ ability to detect early potential problems and rectify them if possible (in the first instance by retaining cash surpluses within the company). Further, if remedial action is not possible or fails, the security arrangements are used to maximise recovery prospects.

Security is sometimes not allowed or is not enforceable on certain assets, title of which may be retained by the State or where the company is restricted from giving security over its assets by a pre-existing statute of limitation.

In conclusion, Moody’s believes that structural enhancements, if very comprehensive and effective, can deliver up to 3 notches uplift from the fundamental rating for issuers with rating potential typical of traditional limited recourse project finance structures. Sources of creditor protection can be regarded as very restrictive for management and shareholders, and in any event, may not be suited to particular types of business, where there are multiple strands of operations. Restrictive structures can overly constrain management’s abilities to pursue strategies and policies that they may perceive may enhance shareholder value.

Consequently, in many cases, protective arrangements granted to creditors are not as fully comprehensive as those which provide the maximum amount of uplift under Moody’s methodology. Consequently rating uplifts of one or two notches may be considered a more likely result from this notching exercise.

Assumptions and Limitations, and Rating Considerations that Are Not Covered in the Grid

The rating methodology grid represents a decision to favor simplicity that enhances transparency and to avoid greater complexity that would enable the grid to map more closely to actual ratings. Accordingly, the five rating factors in the grid do not constitute an exhaustive treatment of all the considerations that are important for ratings of companies in the privately-managed ports sector. In addition, our ratings incorporate expectations for future performance, while the financial information that is used to illustrate the mapping in the grid in this document is mainly historical. In some cases, our expectations for future performance may be informed by confidential information that we can’t disclose. In other cases, we estimate future results based upon past performance, industry trends, competitor actions or other factors. In either case, predicting the future is subject to the risk of substantial inaccuracy.

Assumptions that may cause our forward-looking expectations to be incorrect include unanticipated changes in any of the following factors: the macroeconomic environment and general financial market conditions, industry competition, new technology, regulatory and legal actions as well as management’s appetite for M&A or shareholder distributions.

2 A test to assess the effectiveness of financial covenants in terms of definition and threshold levels that we often use is to run increasingly negative downside sensitivities to

see (i) whether and when distribution lock-ups are activated, and (ii) whether trapped cash provides material support to the company’s credit metrics at appropriate stress levels.

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In choosing metrics for this rating methodology grid, we did not explicitly include certain important factors that are common to all companies in any industry such as the quality and experience of management, assessments of corporate governance and the quality of financial reporting and information disclosure. The assessment of these factors can be highly subjective and variable over time. Therefore ranking these factors by rating category in a grid would in some cases suggest too much precision in the relative ranking of particular issuers against all other issuers that are rated in various industry sectors. We note, however, these excluded factors often affect those that are included in the grid (such as strength of management affecting a company’s revenue performance over time).

Ratings may include additional factors that are difficult to quantify or that have a meaningful effect in differentiating credit quality only in some cases, but not all. Such factors include financial controls, exposure to uncertain licensing regimes and possible government interference in some countries. Regulatory, litigation, liquidity, technology and reputational risk as well as changes to consumer and business spending patterns, competitor strategies and macroeconomic trends also affect ratings. While these are important considerations, it is not possible to precisely express these in the rating methodology grid without making the grid excessively complex and significantly less transparent. Ratings may also reflect circumstances in which the weighting of a particular factor will be substantially different from the weighting suggested by the grid. Factor 3 on Management Attitude to Financial Risk is an example. In some instances if a company’s attitude to matters such as financial strategy and proclivity towards debt financed acquisitions is sufficiently extreme, the rating effect could be much greater than that suggested by the weighting in the grid.

This variation in rating considerations can also apply to factors that we choose not to represent in the grid. For example, liquidity is often critical to ratings but in other circumstances may not have a substantial impact in discriminating between two issuers with a similar credit profile. As an example of the limitations, ratings can be heavily affected by extremely weak liquidity that magnifies default risk. A company with a projected covenant breach may be rated lower than a similar company that has ample covenant headroom. However two identical companies might be rated the same if their only differentiating feature is that one has a good liquidity position while the other has an extremely good liquidity position.

Other Rating Considerations

Moody’s considers other factors in addition to those discussed in this methodology, but in most cases understanding the framework presented herein will enable a good approximation of our view on the credit quality of companies in the port sector. Moody’s considers additional factors, including future operating and financial performance that may deviate from historic performance, the quality of management, corporate governance, financial controls, liquidity management, event risk and seasonality. The analysis of these factors remains an integral part of our rating process.

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28 MAY 31, 2013


Moody’s Related Research

Rating Methodologies:

» Moody’s Rating Methodology for U.S. Ports, February 2005 (91482)

» Operational Airports outside of the United States, May 2008 (108552)

» Operational Toll Roads, December 2006 (101003)

» Global Shipping Industry, December 2009 (121410)

» Government-Related Issuers: Methodology Update, July 2010 (126031)

To access any of these reports, click on the entry above. Note that these references are current as of the date of publication of this report and that more recent reports may be available. All research may not be available to all clients.

http://www.moodys.com/viewresearchdoc.aspx?docid=PBM_PBM91482



http://moodys.com/viewresearchdoc.aspx?docid=PBC_121410


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Appendix 1 – Privately Managed Ports Methodology Factor Grid

Factor 1 Market Position Weighting: 25%

Aaa Aa A Baa Ba B Caa Sub-factor % of Factor

Port Size / No. of Ports Owned

Very Strong geographic diversification - a large number of deep sea ports with many international routes. No single terminal makes up more than 20% of company's EBITDA

Between 5 and 10 ports with strong diversification of deep sea routes and broad range of cargos. No single port contributes more than 40% of group EBITDA. OR geographically concentrated port areas with very large volumes (>15 million TEUs or equivalent) and which have multiple terminals mitigating single site risk

Either a single terminal of more than 5 million TEUs/>100 million tons total cargoes, or up to five terminals with strong deep sea bias (>75% international trade)

Single port but with strong level of deep sea routes, OR a number of small ports all based in the same economic area with short sea operations. One million TEU container movements / 30 million tons bulk goods

Single large port with some deep sea route operations with weak but dominant operator that could significant alter volumes

Modest single port with a variety of short sea services.

Small port with dominant short sea operator / ferry and minor Marina services

40%

Quality of Service Area and Connections

Port forms an essential part of the local economy and has an effective monopoly on port services for the region, or is a major transshipment hub. Excellent road, rail and pipeline connections or strong positioning on major sea routes

Assets have very strong road and rail connections to highly populated areas / strong industrial areas with strong record of imports and exports. Within 50 miles of major city > 5million population

Assets have good road and rail connections to moderately strong economic areas

Assets have adequate connections or serve a modest economic area. Good road and rail links able to support significant volumes

Assets have limited connections to major centres, reliant on a limited local economy, OR the port is specifically built as an export route for commodity products e.g. Oil, Timber, Ore or Coal produced by a single concession or mine

Single route port - usually localised ro-ro operations

Port offers only small marina or local services

30%

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30 MAY 31, 2013


Factor 1 Market Position Weighting: 25%


Operational Restrictions

Port is able to accept any current type of ship including post- and superpost-panamax, and turnaround a number of these ships at once. No volume restrictions on the land side

Port able to accept any size of ship, but with limitations to the number of ships at any one time, either due to limited quay space or limited landside infrastructure, but with room to expand

Limitations on ship size to Post Panamax (8,000 TEUs) but with good capacity. Some limitations on operations of port (operating hours / landside infrastructure not scaled to port)

Multi modal but limited to short sea operations and feeder services. Able to accommodate up to Panamax only

Limited to short sea Ro-Ro with limited other forms of load and unload

Port specifically built for one type of vessel

Very restricted port able to take only small vessels

30%

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31 MAY 31, 2013


Factor 2 Diversity of Customer Base Weighting: 10%


Exposure to volume variation

Revenues 100% supported by long-term take or pay contracts or substantially comprise fixed payments with no volume linkage. Mostly bulk or oil with significant landside commitment. Revenues include all conservancy and pilotage fees

Stable cargo throughput by tonnage with long-term take or pay contracts accounting for 80% of revenues. Limited uncontracted volumes or 80% or more of revenue comprises other substantially fixed payments

Limited exposure to volume variations - approximately 2/3 of revenues on take or pay contracts or comprises substantially fixed payments. Limited uncontracted volumes or 2/3 or more of revenue

Moderate exposure to volume variation, with approximately 50% of volumes contracted or comprises substantially fixed payments. High levels of container, and ro-ro traffic. High number of calls from major shipping lines, with strong container transhipment volumes

High exposure to volume variations - largely container based or similar uncontracted volumes. Regular line calls from large shipping companies

Very High levels of exposure to volume variation with very low level of contracts. Cargoes mostly container or RO-RO with historic linkage to GDP movement. Irregular calls by major shipping lines

Extremely unpredictable volumes. No regular calls from shipping lines

50%

Dominance of Customers



50% < Top 10 < 25%

Top 10 >50% Top 3 > 50% Single customer - port specifically built for one operation

50%

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Factor 3 Capital Programme, Stability of Business Model and Financial Profile Weighting: 15%


Scale and Scope of Capital Expenditure Programme

No expansion capex planned - maintenance capex only (typically about 3% of revenues)

Annual expansion capex of up to 5% of revenues not including maintenance capex

Annual expansion capex of 5 -10% of revenues not including maintenance capex

Annual expansion capex of 10 to 15% revenues not including maintenance capex

Annual expansion capex of between 15% and 30%

Major expansion project sized at more than 30% of revenues. Likely to be a major port upgrade / reprofiling

Significant project that will completely change the profile of operations. >40% of revenues

33%

Management attitude to financial risk

Covenants prohibit all corporate activity OR corporate activity is outside of management mandate. No additional indebtedness allowed without debt holder’s consent

Covenants largely limit corporate activity, with the exception of certain defined permitted investments OR Legal status dictates that investment and related debt raising is restricted to capex for existing ports only

Strong track record of no material corporate activity and stated intention to refrain from M&A and /or major investments. Financial covenants in principal debt instruments limit management ability to materially increase leverage

Moderate risk of corporate activity which may impact credit metrics for 18-24 months only. Conservative financial strategy, unlikely to compromise minimum financial parameters

Track record of repetitive, sizeable transactions. Limited track record of consistent financial policies; likely to target high leverage

Highly likely to conduct frequent and very large opportunistic investments. Track record of aggressive financial policies and very high leverage; likely to pay out creditors' financial cushion ahead of business pressures

33%

Proportion of Revenues from Non-Core Activities

0% (Exclusive focus on core owned ports’ activity) OR Debt Covenants prohibit all other businesses

Up to 5% of revenues from non-core activities OR debt covenants largely prohibit all other businesses with the exception of certain defined and low risk permitted businesses

Between 5 and 10% of revenues from non-core activities OR debt covenants largely prohibit all other businesses with the exception of certain defined and low risk permitted businesses

Between 10 and 15% of revenues are generated by non-core activities. May be additional restrictions in debt covenants

Between 15 and 25% of revenues are generated by non-core business

>25%. A material proportion of revenues are generated by business which are not directly related to the operation of the port. These include shipping, freight forwarding, road haulage, and long-distance rail haulage

33%

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Factor 4 Nature of Asset Ownership Weighting: 10%


Ownership and Control of Assets

All key port assets held outright in perpetuity (freehold) and controlled by port management

All key assets controlled by port management and held under long term property leases with very limited Grantor termination rights

All key port assets controlled by port management and held under a Concession Agreement with finite life (albeit long-term) with limited Grantor termination rights (e.g. for insolvency only)

All key port assets controlled by port management and held under a Concession Agreement with a finite life. Grantor termination rights for under-performance or failure to meet certain financial parameters

Certain key assets held and managed by third parties (e.g. Stevedoring services, container / oil / bulk terminal operations etc.), others held in perpetuity, leased or under concession

Key assets held under a short term operating lease or licence type arrangement

The port is in default under a lease or concession arrangement likely to lead to the termination of that contract

100%

Factor 5 Key Credit Metrics Weighting: 40%


Cash Interest Coverage

Over 8.0x 6.0x to 8.0x 4.5x to 6.0x 3.0x to 4.5x 2.25x to 3x 1.5x to 2.25x Less than 1.5x 25%

FFO/Debt Over 40% 25% to 40% 15% to 25% 10% to 15% 6% to 10% 3% to 6% Less than 3% 25%

Moody's DSCR Over 8.0x 6.0x to 8.0x 4.5x to 6.0x 3.0x to 4.5x 2.0x to 3.0x 1.5x to 2.0x Less than 1.5x 25%

RCF / Capex >3.5X 2.5x to 3.5x 1.5x to 2.5x 1.0x to 1.5x 0.5x to 1.0x Less than 0.5x Less than 0.5x 25%

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34 MAY 31, 2013


» contacts continued from page 1

Analyst Contacts:

NEW YORK +1.212.553.1653

Kurt Krummenacker +1.212.553.7207 Vice President - Senior Credit Officer [email protected]

MILAN +39.02.9148.1100

Marco Vetulli +39.02.9148.1123 Vice President - Senior Credit Officer [email protected]

SINGAPORE +65.6398.8300

Ray Tay +65.6398.8306 Assistant Vice President - Analyst [email protected]

Report Number: 149365

Author Paul Lund

Senior Production Associate GingerKipps

© 2013 Moody’s Investors Service, Inc. and/or its licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

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