London: DP World, which enjoys a well-diversified status among its business peers, will remain cash flow negative until 2016 as it makes further acquisitions, according to Fitch Ratings.
Fitch Ratings affirmed UAE-based port operator DP World Limited’s (DP World) long-term issuer default rating (IDR) at BBB- with a stable outlook.
Fitch has also affirmed its senior unsecured rating at BBB- and the short-term IDR at F3. The ratings on the convertible notes due 2024 issued by DP World and the Sukuk unsecured trust certificates issued by DP World Sukuk Limited have also been affirmed at BBB-.
“DP World demonstrated improving cash flow margins in 1H14, supported by strong liquidity, leading to an improvement in the company’s credit metrics. Improved leverage for FY13 is, however, offset by the delay of some capital expenditure into 2014 and beyond, relating to the completion of major port upgrades at Rotterdam and Jebel Ali,” Fitch in a statement said.
“Challenging macro conditions may limit volume progression at DP World’s individual ports. However, additional capacity at Jebel Ali (Dubai), London Gateway and Rotterdam should support consolidated volume growth and margin progression, offsetting our expectations of weaker trade activity,” Fitch in a statement said.
DP World is one of the four largest container port operators globally based on volume. Its global market share remained at around 10% (5.4% on a consolidated basis) as at end-December 2013. The company’s volume throughput is anchored by its operation of Jebel Ali port in Dubai, giving it a dominant market share in the Middle East.
DP World’s terminal interests are located close to key import and export markets. About 75% of the company’s volumes are more stable ‘origin and destination’ cargoes, enabling it to generate stronger and more stable margins than its peers. Dubai’s Jebel Ali port in particular, one of the largest container ports between the Far East and the western hemisphere, is geographically well-located, serving as the key gateway to the Middle East and the growing markets of India and Africa. The upgrade of terminals to capture the latest generation of 18,000 TEUs capacity container ships helps preserve its competitive position.
DP World exceeded Fitch’s forecasts for FY13, with funds from operations (FFO)-adjusted net leverage about 3.3x. This reflects the high level of unrestricted cash reserves being carried by DP World (USD2.5bn at FYE13). The improvement in leverage relative to Fitch’s forecasts was further aided by disposal proceeds of USD749m from the sale of the CSX Hong Kong container terminal and other smaller assets completed in FY13.
Fitch expects FFO-adjusted net leverage for FY14 to remain close to this level, but weaken in FY15 to about 4.0x, reflecting potential acquisition activity. Fitch expects FFO fixed charge coverage to improve to about 2.6x for 2014 from 2.4x in 2013, reflecting improving cash flows.
“The industry is cyclical with throughput volumes highly correlated to macroeconomic developments. In FY13 DP World’s consolidated volumes fell slightly, reflecting volatile economic conditions. The significant decrease in volumes in Asia was the result of deconsolidation of some of its interests, reflecting DP World’s strategy to focus on handling a smaller number of higher-margin containers. Throughput for 1H14, however, was 8.5% higher than the same period in 2013, compared with a global increase in container traffic of 4.9%, demonstrating DP World’s strong ability to capture trade,” Fitch added.
DP World’s plan to invest $3.7billion capex in 2012-2014 is delayed, with $500million of expenditure extended into 2015 to develop additional capacity. Fitch expects full year capex for 2014 of about $1.4billion, and for 2015 $1.2billion. DP World has some flexibility to defer investments, particularly where capex relates to a terminal’s super-structure such as cranes. Maintenance capex is typically around $150million per year, 3% of total property, plant and equipment.
Cash and cash equivalents amounting to $3.5billion as of end-June 2014 and undrawn committed borrowing facilities of $3.7billion more than satisfactorily cover short-term debt of $82.6million due in 2014. The next significant maturity is the $1.5billion Sukuk in 2017. DP World in June 2014 issued a $1billion 10-year convertible bond with a conversion share price of $27.14, further improving liquidity, ensuring adequate funding for capex over the next two years.
The ratings reflect the standalone credit profile of DP World and do not include support or constraint from its ultimate parent, the Dubai government. Fitch views DP World’s links with the Dubai government as moderate given the absence of any formal financial guarantees, according to the agency’s Parent and Subsidiary Linkage methodology.
DP World’s assets remained ring-fenced during the debt restructuring process of its direct parent company, Dubai World. In addition, despite change of control clauses in the documentation of its syndicated loan, Sukuk bond and MTN programme, Fitch notes that DP World’s debt has no cross-acceleration provisions related to Dubai World or its subsidiaries above DP World in the capital structure.