Fitch Ratings has assigned the following ratings for Autoridad del Canal de Panama’s:
–Long Term Issuer Default Rating (IDR) ‘A’;
–Proposed senior unsecured notes ‘A (EXP)’.
The Rating Outlook is Stable.
The expected ratings reflect the strategic importance of Autoridad del Canal de Panama (ACP) and the legal framework that provides autonomy to the entity. ACP’s stable performance based on the canal’s resilience to economic downturns, solid competitive position and diversified revenue sources are also important attributes supporting the rating. The ratings incorporate a solid business position supported by the canal’s capacity, particularly post expansion. The Panama Canal offers a unique connectivity to world maritime trade. Other notable factors include expectations that ACP will continue maintaining high margins, solid liquidity, modest working capital requirements and low financial leverage.
KEY RATING DRIVERS
Strong Strategic Asset for Global Trade Flows: The Panama Canal (Canal) is a key player in global trade as it has a privileged geographical position. Approximately 2.4% of the world maritime commerce transits the Panama Canal. The Canal offers a unique connectivity to world maritime trade, linking two oceans, ports, rails and ancillary services adding value as the main transshipment hub in the region.
Legal Framework Support ACP’s Autonomy: Constitutional and legal framework supports operational autonomy. ACP is the entity of the Panamanian Nation established under the Constitution with exclusive charge of operation, management, and modernization of the Canal. Fitch considers as credit positive the moderate reliance of the government of Panama on ACP’s financial contribution as it represents approximately 2% of GDP. Fitch believes ACP will continue generating dividends and royalties to the government of Panama. Moreover, the risk of government interference is adequately mitigated with ACP’s institutional autonomy, and incentives are aligned to maintain the Panama Canal as a profitable entity. The rating incorporates ACP’s long track record of managing profitable operations through different governments. Moreover, the rating reflects expectations that the Canal will continue to be managed under same legal framework.
Established Transport Asset in Competitive Region [Revenue Risk Volume- Stronger]: ACP’s operations have demonstrated resilience through global economic downturn periods. The revenue mix is exposed to global trade fluctuations and competitive forces, leading to a degree of volume volatility. The tonnage transiting the canal is also subject to maritime industry changes (size of vessels) and competition from alternative routes. Still, the canal provides a unique connectivity and time savings to world maritime trade. The main route for the Panama Canal in terms of revenues is Asia-East Coast USA, which represented 39% of total toll revenues as of September 2014. The main competitor serving the Asia-East Coast USA is the Suez Canal. Another competitor for this route is the intermodal USA system. Post expansion, the Panama Canal is expected to regain any market share it lost to the Suez Canal.
Robust Tariff-Setting Flexibility [Revenue Risk Price- Stronger]: ACP has successfully demonstrated a tariff structure that periodically changes to capture the changing dynamics of maritime industry. A proactive approach in adjusting tariffs annually in accordance with varying types of content in containers and sailing schedules has provided stable cash flow generation. Shipping line consolidation to improve margins couple with U.S. intermodal transport alternative may pose challenges to the canal’s pricing flexibility.
Big Ship Readiness and Modernizing Facilities [Infrastructure Development/Renewal- Stronger]: The expansion is expected to create economies of scale in maritime transport allowing 5,200 – 14,000 TEU vessels to use the new locks from current limit of 5,000 TEU capacity. With the USD5.4 billion major canal expansion near completion, annual capital investments are expected to be significantly lower in the intermediate term beginning with 2017 fiscal year.
Solid Liquidity and Amortizing Fixed Rate Debt Profile [Debt Structure- Stronger]: ACP’s longstanding ability to steadily generate significant amounts of operating cash flow underpins its considerable liquidity. Fitch expects the company to maintain a cash balance of around USD2.5 billion during 2015 -2017 providing the company with comfortable liquidity headroom. ACP has no refinancing risk with an approximate average debt life of 14 years. The majority of the company’s debt is fixed rate and amortizing beginning in 2019 through 2028. Repayment of the $450 million rated portion is payable in two bullet payments.
Unleveraged Business, Net Leverage Expected to Remain Low [Debt Service]: As of June 30, 2015, ACP had USD2.3 billion of total debt. One hundred percent of the company’s debt is unsecured, and obtained from multilateral institutions. The company’s gross leverage, measured as total debt to EBITDA ratio, reached levels of 1.1x and 1.6x, respectively, and 1.6x during FY2013, FY2014, and LTM June 2015, respectively. Considering its liquidity position, the company’s net leverage ratio was 0.1x as of June 30, 2015. ACP’s gross leverage ratio is expected to reach its peak around 1.9x during 2015 – 2016 period and then decline to levels around 1.5x by the end of FY2018. EBITDA margins of approximately 50%, total net leverage below 1.0x with a liquidity position up to USD 1 billion is expected under Fitch’s rating case.
Peer: Among Fitch’s rated transport portfolio there is no direct comparison for the Panama Canal. However, ACP’s base case leverage, measured as Net debt/EBITDA of 0.5x compares favourably with other large intermodal transportation entities, such as: Harbor Department of Los Angeles (‘AA’/Stable Outlook), Port Of Long Beach (‘AA’/Stable Outlook) and McAllen International Toll Bridge system (‘A’/Stable Outlook) which have net debt/EBITDA of 2.3x, 1.5x and 1.7x, respectively.
RATING SENSITIVITIES
Positive: A combination of ACP’s financial performance consistently above base case expectations and a positive rating action to the Sovereign rating of Panama may result in a positive rating action.
Negative: A significant and sustainable deterioration in the company’s credit metrics (margins, liquidity, and financial leverage) due weaker than expected macro and business environment and/or more aggressive levels of capital investments or leverage beyond our rating case scenario. Moreover, a notable change in ACP’s autonomy or operational ties with the government through adjustments to the legal framework could impact the rating.
TRANSACTION SUMMARY
The Panama Canal Authority (ACP) is the entity of the Panamanian Nation established under Title XIV of the National Constitution with exclusive charge of the operation, administration, management, preservation, maintenance, and modernization of the Canal, as well as its activities and related services, pursuant to legal and constitutional regulations in force, so that the Canal may operate in a safe, continuous, efficient, and profitable manner. The Organic Law of June 11, 1997, furnishes the ACP with legislation for its organization and operation. Because of its importance and uniqueness, ACP is financially autonomous, and its patrimony is inalienable.
The Panama Canal is approximately 80 kilometers long between the Atlantic and Pacific Oceans. The Canal uses a system of locks -compartments with entrance and exit gates. Ships from all parts of the world transit daily through the Panama Canal. Some 13 to 14 thousand vessels use the Canal every year. The Panama Canal serves more than 144 maritime routes connecting 160 countries and reaching some 1,700 ports in the world. The Canal has a work force of approximately 10 thousand employees and operates 24 hours a day, 365 days a year, providing transit service to vessels of all nations without discrimination.
The Panama Canal offers easy access to North America, Latin America, Caribbean and Asia. Panama offers a unique connectivity to world maritime trade, a canal that links two oceans and ports, an interoceanic railroad, ancillary services for ships and ports, and a shipyard for oceangoing ships, adding value to the Panama route as the main transshipment hub in the region. The Panama Canal competes in terms of distance savings in days, which translates to monetary savings for the users of the routes. The main route for the Panama Canal in terms of revenues is Asia-East Coast USA, which represented close to 40% of total toll revenues.
The Panama Canal expansion will extend the area of influence in the region as vessels of larger sizes could transit the Panama Canal. The expansion will create a new lane of traffic along the Canal, doubling the waterway’s capacity. The Canal Expansion will create economies of scale in maritime transport, allowing the transit of New Panama vessels — which are vessels with a capacity to carry cargo between 5,200 – 14,000 containers of TEU size. At present, the Canal can accommodate Panamax vessels with up to 5,000 TEU capacity. This will provide an opportunity to increase the Canal’s tonnage in transit as larger vessels transit; additionally the ACP will continue to offer complementary services that contribute to competitive position of the Canal. The number of transits is expected to decrease as larger cargo vessels use the Canal.
According to the Neutrality Treaty signed by Panama and the United States on Sept. 7, 1977, the Canal shall remain secure and open to peaceful transit by the vessels of all nations on terms of entire equality, without discrimination of any kind.