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International Container Terminal Services Inc. (ICTSI) - Credit Outlook: Stable | Valuation: Neutal

International Container Terminal Services Inc. (ICTSI) - Credit Outlook: Stable | Valuation: Neutal

Credit positives

  • ICTSI issued a new (USD 375m 4.875%), less expensive, callable perp. bond (2024) and repurchased USD 345m in total of two callable perp. securities, deferring payments from 2019 and 2021 to 2024. DFRS estimates the cash flow effect until 2021 at USD 340m, given the new rate on the redeemed amount.
  • We consider the issue of perp. bonds as a balance sheet positive with a minor effect on credit metrics for ICTSI as perps. are recorded as equity.
  • The group has no significant maturities until 2019.
  • Refinancing risk is considered considering the easy access to capital that ICTSI displayed with the perpetual securities refinancing

 Credit negatives

  • ICTSI is not covered by any major rating agency (S&P last rated it at A- back in 2011). We believe ICTSI would stand at the investment grade zone, one notch below the sovereign which is rated as BBB/Baa2/BBB- by S&P/Moody’s/Fitch.
  • Credit metrics worsened in LTM 3Q16 although they are not in distressed levels.
  • Post 2019, the group is exposed to bullet redemption of debt as amortising loans form a small part of commitments.
  • ICTSI operates in a highly capital-intensive business. M&A activities to support growth, will have a negative impact on credit metrics.
  • Challenging global trade environment and pricing pressure from container lines increases execution risk on ICTSI’s expansion plans.
  • FCF continued in the red in LTM 3Q16 after capex remained relatively unchanged at USD 431m for the same period.

Investment  view

  • The current environment in fixed income suggests that we are heading towards a steeper curve for global yields, partly stemming from higher inflation and growth prospects. The central bank of Philippines, however, decided to hold rates at the current levels (3% for the overnight reverse repurchase rate and 2.5% for the overnight lending deposit rate) in response to the US elections outcome and the rate hike. We believe that duration risk is greater towards the high end of the curve giving an advantage to lower duration bonds with stable credit risk, in our view. ICTSI’s notes duration is on average 2.24 under the assumption perps. will be redeemed at the first call/step-up date as was the case for all the redeemed perps. so far. On the credit risk side, ICTSI is not rated by any of the major credit rating agencies; however, we would place the notes one notch below the sovereign rating of BBB/Baa2/BBB- (S&P/Moody’s/Fitch) at the lower part of the investment grade space. The reasoning behind that is the wider yield spreads offered by ICTSI’s bonds compared to the sovereign. We believe ICTSI’s credit outlook is Neutral. Overall we remain cautious on the bonds’ valuation and place the issuer’s notes on our Neutral list. However, we view the newly issued 4.875% perp. bonds callable in 2024 (+2.5% step-up date as well) as Attractive, assuming an exercise of the call option as was the case for all perps so far, offering yields of more than 100bps above the BBB EM curve (Asia and ME bond selection).

We assign a Stable credit outlook: Although credit metrics worsened in LTM 3Q16, they still lie above distressed levels and will not refrain meaningfully in the short to medium term, in our view. In the last five years. ICTSI‘s volatility in leverage and coverage came in low supported by improving profitability and responsible debt drawdown. The group has been funding growth without spikes in credit metrics or liquidity shortfalls. Liquidity is considered adequate covering more than four times short-term debt obligations and concession rights.

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International Container Terminal Services Inc. (ICTSI) - Credit Outlook: Stable | Valuation: Neutal


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