Fitch Ratings has affirmed the 'BB' rating of the fixed-rate USD 350 million senior secured notes issued by Prumo Participacoes e Investimentos S.A. (Prumopar).

The Rating Outlook is Stable.

RATING RATIONALE

The rating reflects Prumopar's stable cash flow, derived from distributions from Ferroport Logistica Comercial Exportadora S.A. Ferroport benefits from a long term take-or-pay (ToP) agreement with a creditworthy counterparty and is a strategic asset for Anglo American plc as the sole export terminal for the iron ore produced by its Brazilian subsidiary's mines in Minas Gerais state. Revenues and debt service are linked to U.S. dollars (USD), while operational expenses are linked to Brazilian Reais (BRL), exposing the transaction to BRL appreciation.

The notes have fixed rate and include a balloon payment at maturity in 2031. In Fitch's scenarios, the refinancing risk is partially mitigated by cash sweep mechanism that reduces the balloon payment to 4.3% of total debt (USD 15 million), as well as the eight years ToP tail in Fitch's Rating Case. Under the rating case the minimum Project Life Coverage Ratio (PLCR) is 1.6x in 2023, and by the time of the refinancing in 2031 the projected PLCR is 4.3x, which demonstrates that the company has the ability to refinance its obligation. Peak leverage, measured by Net Debt over Cash Flow Available for Debt Service (CFADS), is 6.2x in 2024.

Despite the metrics being commensurate with higher rating categories, the rating is constrained by Brazil's country ceiling, Ferroport's short track record of operations without disruption, and by a residual exposure to foreign exchange risk.

KEY RATING DRIVERS

Dedicated Terminal [Revenue Risk: Volume - Midrange]:

Ferroport has operated since 2014 and benefits from a long-term ToP agreement with Anglo American Minerio de Ferro Brasil S.A. (AAMFB), subsidiary of Anglo American plc (BBB/Positive). It is a small port of call, built to suit Anglo's Minas-Rio iron-ore project and handles a specialized type of cargo, with its inbound market access highly dependent on the slurry pipeline from the mine into the port.

Long Term Take-or-Pay Agreement [Revenue Risk: Price - Stronger]:

The ToP agreement sets forth annual tariffs readjustments that follow two-thirds of U.S. inflation, measured by Producer Price Index (PPI) for Industrial Commodities, and it has been readjusted in a timely manner since the port began operations. Fitch's cases do not include interruptions similar to the suspension of payments under the ToP agreement that occurred in 2018 concurrent with leaks in the slurry pipeline.

The revenues and debt are U.S. dollar-denominated, but operational costs and expenses are denominated in BRL, exposing the transaction to Brazilian Real appreciation scenarios when margin EBITDA is reduced due to higher USD equivalent operational costs and expenses. Ferroport is also entitled to collect fees, modest in Fitch's Rating Case, based on the number of vessels berthing, oil transhipment volume and berthing time.

Adequate Infrastructure [Infrastructure Development & Renewal - Midrange]:

Ferroport's facilities are new, and Fitch expects key equipment to have long useful lives. No replacement requirements are foreseen throughout the life of the transaction. Planned investments comprise predominantly channel dredging, increase of stacking capacity and maintenance works to preserve operational efficiency and environmental compliance.

The ToP establishes the potential for expansion, and Ferroport has the option to agree to expand; if it does, the contract establishes an additional tariff for this incremental volume, calculated in order to assure an Internal Rate of Return (IRR) of 15%. Otherwise, AAMFB has the option to make required the capex itself. However, as per the transaction documents, capex in excess of USD 20 million requires bondholder approval.

Refinance Risk Partially Mitigated by Cash Sweep [Debt Structure - Midrange]:

Rated debt is senior at Prumopar's level but structurally subordinated to Ferroport. Cash flows to service debt will come from the payment of intercompany loans and dividend distributions. Ferroport does not hold financial debt; its capex was funded through intercompany loans from Prumopar and Anglo American. Additional indebtedness is limited to USD 50 million, according to Ferroport's Shareholders Agreement (SHA), which also requires the distribution of all cash available at Ferroport.

The rating reflects the clause of the SHA, which may result in the suspension of Prumopar's voting rights at Ferroport if the bankruptcy of any member of Prumopar's shareholder group is not enforceable under Brazilian law, assuring Prumopar's voting power against new indebtedness at the operational company, as per the transaction's documents. This view is supported by a legal opinion on the subject requested by Fitch.

The debt has a fixed interest rate and its legal amortization comprises a balloon payment of up to 55.1% (USD 193 million) in 2031. The debt structure also contemplates a target amortization schedule, set to allow for the debt to be fully amortized in 12 years, under the issuer's case, through a cash sweep mechanism. In Fitch's Rating Case, the balloon payment is for 6.3% (USD 22 million) of the initial debt quantum. The debt structure also counts with a six-month offshore DSRA and lock-up provisions that require compliance with target debt balance coupled in order for Prumopar to be allowed to distribute dividends.

Financial Profile

Under Fitch's Base and Rating cases, a balloon payment is due in 2031, indicating a Loan Life Coverage Ratio (LLCR) below 1.0x. Refinancing risk is mitigated by a PLCR, which considers the cash flows available for debt service until the end of ToP agreement, of 4.3x in 2031 in Fitch's Rating Case. Prumopar's Net Debt-to-CFADS peak is 6.2x in 2024, under Fitch's Rating Case, a comfortable level in light of the eight-year ToP tail. Credit metrics are somewhat strong for the rating level, which is constrained by Brazil's country ceiling, the history of some operational disruptions and a residual exposure to foreign exchange risk.

PEER GROUP

Prumopar's closest peer is North Queensland Export Terminal Pty Ltd (NQXT) (senior secured notes; BB+/Stable). Both are single-purpose mineral export terminals, comprise medium- to long-term ToP contracts and present refinance risk. The NQXT's rating, two notches above Prumopar's, reflects a better set of metrics of leverage, DSCR and PLCR). Additionally, Prumopar's rating is constrained by Brazil's country ceiling, Ferroport's short track record of operations without disruption, and by a residual exposure to foreign exchange risk.

Prumopar presents leverage comparable to EP BCo S.A. (EP) (Long-Term Issuer Default Rating (IDR); BB-/Negative), the financial vehicle and sole shareholder of Euroports Holdings Sarl (Euroports). Euroports is a large, deep-sea port terminal operator in Europe and China that presents a peak-leverage in Fitch's Rating case of 6.0x, while Prumopar's is 6.2x. The Negative Outlook on EP's reflects the continued uncertainty around Euroports' expected deleveraging path following the around EUR40 million of additional debt. Although EP has lower leverage, Prumopar has a ToP agreement that provides more resilience in revenues and Prumopar's debt is fixed-rate, while EP's presents exposure to floating rates.

RATING SENSITIVITIES

Factors that could, individually or collectively, lead to negative rating action/downgrade:

Operational disruption negatively impacting the cash flows;

A negative rating action on Brazil's sovereign rating.

Factors that could, individually or collectively, lead to positive rating action/upgrade:

Achievement of the target amortization schedule in a sustained basis;

Favorable track record of operations without disruption;

A positive rating action on Brazil's sovereign rating.

Best/Worst Case Rating Scenario

International scale credit ratings of Sovereigns, Public Finance and Infrastructure issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of three notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.

TRANSACTION SUMMARY

Prumopar is a wholly-owned subsidiary of Prumo Logistica S.A. that holds a 50% share of Ferroport, a joint venture between Prumopar and Anglo American Investimentos Minerio de Ferro Ltda., a subsidiary of Anglo American plc. Ferroport is the exclusive export terminal for iron ore produced by Anglo's Minas-Rio project located in Minas Gerais.

Ferroport is the owner of an area of 300 hectares in the Acu Port, where iron ore is processed, handled and stored. The facilities include an offshore structure comprising an access bridge, access canal, breakwater and two berths for iron ore loading. Ferroport benefits from a 25-year ToP with AAMFB, until 2039, for 26.6 million wet metric tons per year.

Ferroport was also responsible for the construction of the T1 port terminal and signed a Port Access Agreement with AAMFB and Vast Infraestrutura S.A. (owner of the oil transshipment terminal in the T1 of Acu Port), also valid until 2039, which establishes that Ferroport is responsible for the maintenance of T1 offshore infrastructure, including the dredging of access channel and breakwater, and will charge port fees based on the number of vessels berthing, oil transshipment volume and berthing time.

Ferroport is the last line in the logistics chain and an integral part of Anglo's Minas-Rio iron-ore project, which comprises 5.3 billion tons of mineral resources. The Minas-Rio project is located in the States of Minas Gerais and Rio de Janeiro. It is 100% owned by Anglo American plc, and it is composed of integrated systems of open pit mines, a beneficiation plant, a 529 km slurry pipeline and lastly, Ferroport.

CREDIT UPDATE

Anglo American's ToP provides for resilient revenues regardless the volume handled, therefore, Prumopar was not affected by the coronavirus outbreak. Ferroport handled 23.8 and 8.9 million tons of iron ore in 2021 and in the first half of 2022, respectively.

Ferroport's adjusted EBITDA of 2021 has increased 7.3%, which has enabled Ferroport to distribute to Prumopar and Anglo-American BRL 471.5 million in intercompany loan. For the first half of 2021, EBITDA decreased 5.5% in relation to the same period of the previous year. Intercompany loan and dividends payments totaled BRL 214.6 million.

FINANCIAL ANALYSIS

The main assumptions of Fitch's Base Case include:

US PPI: 7.0% in 2022, 3.6% in 2023, 2.7% in 2024 and 2.0% from 2025 onwards;

Foreign Exchange Rate (BLR/USD): 5.20 in 2022, 5.20 in 2023, 5.20 in 2024, and depreciation according with the IPCA (Brazilian CPI) and PPI variation from 2025 onwards;

Volume: minimum guarantee throughput of 26.6 million tons per year;

Tariffs: adjusted according ToP agreement (67% of US PPI);

Operational and Capital expenses: 5% higher than sponsor's case;

Transshipment volume: 70 services per year.

The same assumptions were used in the rating scenario, with the exception of:

Operational and Capital expenses: 10% higher than sponsor's case;

Transshipment volume: 63 services per year.

In Fitch's Base Case, minimum PLCR is 1.6x, considering the ToP tenor. Maximum leverage (net debt/CFADS) is 5.8x in 2024. In 2031, the PLCR is 5.6x and the debt is fully amortized considering the target schedule. In Fitch's Rating Case, minimum PLCR is 1.6x, also considering the ToP tenor. Maximum leverage (net debt/CFADS) is 6.2x in 2024. In 2031, the PLCR is 4.3x and the debt's balloon is 4.3%.

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

ESG Considerations

Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg

(C) 2022 Electronic News Publishing, source ENP Newswire