Fitch Ratings has assigned a 'BBB' rating to the FA MGT Limited Partnership (MGT) $305 million of 2016 guaranteed senior secured notes. The Rating Outlook for all bonds is Stable.

Rating Rationale

The rating reflects MGT's operating profile, which is exposed to some competition from Termont, the other terminal operator serving the Port of Montreal (MPA, Port of Montreal or Montreal Port Authority). In addition, the rating reflects how MGT benefits from the Port of Montreal's strategic location on the Saint Lawrence Seaway and its position as the primary gateway port for Eastern and Central Canada. The lack of long-term contracts with shipping lines is somewhat mitigated by the long operating history of existing shipping customers at the port, coupled with their lack of cost-effective alternative access points for serving the Quebec and Ontario markets. Leverage is modest compared to peers, though the non-amortizing structure introduces some refinancing risk to the debt structure, limiting the rating.

Key Ratings Drivers

Strong Position Serving Strategic Port: Revenue Risk: Volume - Midrange

MGT is the largest container operator at the MPA, operating two of the port's four international container terminals. Montreal is the primary port of call for Central Canada, especially Quebec and Ontario, which are the two biggest provinces and largest markets in Canada with a combined population of more than 23 million, representing 62% of Canada's population and 57% of Canada's real GDP. The MPA has a captive market serving primarily local demand from the strong economic centers of Ontario and Quebec (80% market capture). Volumes through the overall port are high at 1.7 million twenty foot equivalent units (TEUs).

MGT's franchise strength within the port is strong, handling roughly 900,000 TEUs annually representing about 54% of the Port of Montreal market share (and 100% of non-MSC-volumes). MGT's facilities are well utilized but not constrained, currently operating at 69% utilization. MGT has experienced a compound annual growth rate of 2.1% for TEU volumes from 2009 through 2018, as compared to MPA's CAGR of 3.4% for the same period. Fitch notes that the port saw a sizable decrease in volumes through the last recession, with overall Montreal port volumes falling 15% and MGT falling 25%. However, the larger decline by MGT was due in part to a structural shift in its customer base, whereby discretionary U.S. Midwest traffic moved from Montreal. Management believes that this was a one-time loss in market share, driven by the U.S. Midwest being served by U.S. East Coast ports, which use larger vessels.

Established Customers, Limited Contracts: Revenue Risk: Price - Midrange

Contracts with shipping lines are generally short in duration, averaging three to five years, with contracted price escalation matched to labor rate increases and CPI. The expectation is that the shipping lines currently utilizing MGT (Hapag-Lloyd, OOCL, Maersk, CMA-CGM) will renew their agreements and continue to direct their volumes through MGT, given Termont handles MSC volumes almost exclusively and MSC is a partial owner of Termont. MGT has previously handled some overflow in volumes from Termont, though this is not expected to continue, given expansion at the Termont Viau terminal. Fitch notes there are no minimum volume guarantees in MGT's agreements with the shippers, exposing revenues to greater potential volatility.

Modest Capex Requirements: Infrastructure and Renewal Risk: Stronger

The current MGT capex projection for 2019-2031 consists of investments to either refurbish existing equipment or purchase replacement equipment, improving MGT's cargo handling efficiency or reducing operating costs. Replacements consist largely of purchasing new rubber tire gantries (RTGs) and new ship-to-shore cranes (STS). MGT's 2019 through 2031 capital expenditure requirements are modest, totalling $99 million and averaging $7 million per year. MGT is using equipment lease financing for the purchase of the new equipment.

Fixed Rate Bullet Debt: Debt Structure: Midrange:

The acquisition of MGT, which closed in March 2015, was financed with a five-year term loan. This term loan was refinanced in 2016 with a C$305 million non-amortizing private placement fixed-rate bond maturing in 2026. The bullet nature of the bond exposes the operator to refinancing risk in 2026. In place of a cash funded DSRA, there is a standby letter of credit (LC) equivalent to six months of debt service (interest only).

Financial Profile

Fitch's base case adopts management projections from 2020 through 2031, projecting TEU growth at a CAGR of 1.7% per year (consistent with Fitch's Canadian GDP forecast of 1.6%-1.7% for the 2019-2021 period), while net revenues grow at a CAGR of 4% per year over the same period (largely reflects inflationary rate increases). Operating expenses grow at approximately 2.8% per year. Senior synthetic DSCR including P&I averages 2.9x (minimum of 2.3x), while Net total Debt/EBITDA reaches a maximum of 5.4x. Fitch's rating case assumes slower CAGR TEU growth of 1.2% per year from 2020 through 2031. Revenue growth is also assumed to grow at a CAGR of 2.1% per year, while operating expenses grow at 3.6% per year. Senior P&I DSCR coverage averages 2.4x (minimum of 2x), with total Debt/EBITDA reaching a maximum of 5.5x.

Peer Group

Relevant Fitch rated peers include Alabama Port Authority (rated BBB+/Stable) in the United States and DP World (rated BBB+/Stable) in Dubai. Compared to MGT, Alabama's leverage (calculated on a Net Debt/CFADS basis) is higher at 6.1x compared to MGT's at 5.4x. Total coverage for Alabama is also lower at 1.8x. DP World's leverage (calculated on a Net Debt/EBITDA basis) is lower than MGT's, reaching a maximum of 3.9x over the next five years. While MGT's coverage remains high and leverage is modest compared to peers, the non-amortizing structure introduces some refinancing risk to debt structure, limiting the rating.