Fitch Ratings has placed Far-Eastern Shipping Company Plc
(FESCO) ratings, including its Long-term foreign currency Issuer
Default Rating of 'B' on Rating Watch Negative (RWN). A full list
of ratings actions is provided at the end of this commentary.
The rating action reflects the underperformance in FESCO's rail
division and substantial rouble depreciation which hits its credit
metrics as over 80% of its debt is in U.S. dollars. While liquidity
is currently adequate, Fitch expects that weaker margins, foreign
currency mismatch and working capital outflow including for margin
calls relating to FESCO's stake in OJSC TransContainer (BB/Stable)
may weaken FESCO's liquidity in 2015.
Fitch may downgrade the ratings during the next six months if
the agency thinks that FESCO is unlikely to achieve funds flow from
operations (FFO) net adjusted leverage towards 5x by year-end 2015
(YE15) or if its liquidity deteriorates.
KEY RATING DRIVERS
Rouble Depreciation
FESCO is subject to foreign currency fluctuations risks as more
than 80% of its total debt at end-September 2014 was denominated in
U.S. dollar, comprising two eurobonds that mature in 2018 and 2020.
This contrasts with only around 46% of revenues that are U.S.
dollar-linked or U.S. dollar-denominated. The company is seeking to
improve the natural hedge of its earnings through renegotiation of
its contracts and through focusing on exports at the Vladivostok
port. Fitch notes that while repayment risk is not imminent in the
short term, the recent decline of rouble versus the U.S. dollar
crystallises conversion risk.
Continued Rail Division Underperformance
FESCO's rail division reported revenue of USD126m and EBITDA of
USD37m in 9M14, a 37% and 50% year-over-year (yoy) decline
respectively. This was mainly driven by about 21% decline of
gondola rates and the 5% yoy reduction of non-container cargo
transportation volumes. Freight rail volumes and prices declined in
9M14, mostly due to overall stagnation of the Russian economy - in
particular industrial production, and intensifying competition.
Fitch does not expect significant volume recovery in the
short-to-medium term given the expected GDP fall in 2015, nor does
Fitch expect gondola rates to increase given the current surplus
capacity.
Port Division Demonstrates Weakening
FESCO's port business is a key source of the company's earnings
representing 55% of group's EBITDA in 9M14, and given its higher
margins. Company's volumes in port segment improved substantially,
mostly due to intensified international trade between Russia and
Asian countries. Vladivostok is one of the largest ports in the
Russian Far-East and is key in the import and export of commodities
as well as consumer goods. Total container and non-container
volumes demonstrated strong growth, while the revenue and EBITDA of
this division declined by 7.8% and 10.5% yoy in 9M14. This was
mostly due to rouble depreciation as well as average rates
decrease. However, the port division continues to perform better
relative to the rail division and Fitch expects faster EBITDA
margins recovery within this division in the short-to-medium term
period.
2014 FCF Expected Negative
Fitch expects FESCO's free cash flow (FCF) to be negative for
2014 mostly due to increased gross capex of about USD70m. However,
Fitch notes, that the company's capex programme is fairly flexible
and subject to market conditions, that together with its policy of
zero dividend payments until fixed charge coverage ratio is below
2.0x and consolidated total leverage ratio is above 3.25x, may
allow management to keep FCF in the positive territory for
2015-2018. Maintenance capex is estimated to range USD25-30m.
Credit Metrics Deteriorate Further
Fitch sees it as unlikely for FESCO to reduce its FFO net
adjusted leverage to below 5.0x by YE15, primarily as a result of
weaker operations and rouble depreciation. Although REPO loan of
EUR73m as of December 2014 with a pledge over FESCO's 24.1% stake
in TransContainer is outside of the restricted group and
ring-fenced, Fitch starts to include it in its leverage
calculations as margin calls payment during 2014 was partially
funded by cash from within the restricted group.
LIQUIDITY & DEBT STRUCTURE
At end-9M14, FESCO's cash and cash equivalents stood at USD160m
compared to short-term debt of USD195m, including REPO loan of
USD150m which was subsequently refinanced and partially repaid.
Additionally, as of end-9M14, the company had unused credit
facilities. Fitch expects FESCO to report negative FCF for 2014,
owning to its substantial capex programme. FESCO's debt repayment
profile is spread with local bonds of RUB5bn (about USD80m) due in
2016 and eurobonds of USD550m and USD325m due in 2018 and 2020
respectively.
Financial covenants (i.e. fixed charge coverage ratio at 2.0x or
higher and consolidated total leverage ratio of less than 3.25x)
per the eurobonds documentation limit the ability to incur
additional debt over certain limits but their breach does not
constitute an event of default as these are not maintenance
covenants. The company adhered to its covenants as at 9M14.
RATING SENSITIVITIES
Negative: Future developments that could lead to negative rating
action include:
-Inability to reduce FFO net adjusted leverage towards 5.0x by
YE15 and maintain FFO fixed charge cover above 1.5x due to
weaker-than-expected operational performance, rouble depreciation
or and/or material debt-funded acquisitions or dividends;
-Weaker liquidity position;
-Signs of additionally increased competition or greater
volatility of earnings in the port and/or rail business.
The ratings are on Rating Watch Negative. As a result, Fitch's
sensitivities do not currently anticipate developments with a
material likelihood, individually or collectively, of leading to an
upgrade. Future developments that could, nonetheless, lead to a
positive rating action include:
-A sustainable improvement in FFO net adjusted leverage to below
4.0x and FFO fixed charge cover trending towards 2.0x.
Fitch may affirm the ratings at the current levels if the
company's cash conservation measures allow it to demonstrate
ability to reduce FFO net adjusted leverage towards 5.0x by YE15
and to maintain FFO fixed charge cover above 1.5x as well as
preserve adequate liquidity.
FULL LIST OF RATINGS
Far-Eastern Shipping Company Plc
-Long-term foreign currency IDR of 'B' placed on RWN;
-Long-term local currency IDR of 'B' placed on RWN;
-National Long-term rating of 'BBB+(rus)' placed on RWN;
-Local currency senior unsecured rating of 'B' placed on
RWN.
Far East Capital Limited S.A. (Luxembourg)
-Foreign currency senior unsecured rating of 'B' placed on
RWN.
Additional information is available on www.fitchratings.com
Applicable criteria, 'Corporate Rating Methodology', dated 28
May 2014, are available at www.fitchratings.com.
Applicable Criteria and Related Research:
Corporate Rating Methodology - Including Short-Term Ratings and
Parent and Subsidiary Linkage
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=958336
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Fitch RatingsPrincipal AnalystElina Kulieva,
+74959569901Associate DirectororSupervisory AnalystOxana
Zguralskaya, +7 495 956 70 99Director26 Valovaya StreetMoscow
115054orCommittee ChairpersonJosef Pospisil, +44 20 3530 1287Senior
DirectororMedia RelationsPeter Fitzpatrick, London, +44 20 3530
1103peter.fitzpatrick@fitchratings.com