Credit rating agency Fitch has downgraded its ratings of Brazilian terminal operator Libra Terminal Rio.
On 24 March 2016, it downgraded the operator’s long-term foreign and local currency Issuer Default Ratings (IDRs) from BB+ to BB.
This move was based on the assumption that volumes at Libra Rio and Libra Santos would decline by 20% and 3.5% in 2016 respectively.
In a statement, Fitch said this was because of: “The severe deterioration in [Libra Rio’s] operating cash flow and weakening of its credit metrics. The strong economic slowdown coupled with important macroeconomic variables, such as foreign exchange depreciation, increasing competition and the higher cost reduction of the vessel owners, led to significant decline of consolidated volumes and profitability of Libra Holding.”
Brazil’s economy grew very slowly in 2014 and shrunk by around 3% in 2015; the devaluation of the Brazilian Real has hit imports and a new terminal (BTP) opened in Santos in 2014, increasing competition with Libra’s terminal at the port. Shipping lines’ freight rates have been consistently low recently.
The agency went on to predict 2016 would be even harder for Libra than 2015 and point out that the group has compulsory capital expenditure to be completed from 2017 onwards, further hitting cash flow.
This capital expenditure is mainly linked to the renewal of terminal concessions in Santos in September 2015. Libra must invest BRL450m (US$123m) in increasing capacity in Santos terminals by 2019.
Libra has begun measures to reduce costs and increase its liquidity. Fitch said that it had considered these and warned that if these measures are not carried out, additional downgrades may occur.
The ratings agency warned that the company’s debt to profit ratio was higher than it had initially expected.
One positive for Libra though, was Fitch’s praise for the group’s “solid business profile, based on port terminal operations in Rio de Janeiro and in Santos”. The agency called Libra Rio “a mature operation” with a “solid concession contract”.
Fitch’s statement also hinted at long-term optimism for Brazilian terminal operators. “Historically, this industry in Brazil has demonstrated positive long-term fundaments, based on moderately high profitability and relatively predictable demand. The short-term challenges are related to weak industrial activity, significantly pressured by the macroeconomic environment within the country. Fitch believes that Brazilian port activity tends to rapidly benefit from eventual economic recovery.”
Fitch also downgraded the operator’s National Scale Rating to AA- (bra) from AA(bra) and its senior unsecured debentures issuance of BRL270m (US$74m) due 2019 to AA-(bra) from AA(bra).
To put this in perspective, an ‘AA’ rating is the second-best Fitch awards and means the risk of defaults “differs only slightly from that of the country’s highest rated issuers or obligations”.