Outlook On Vessel Owner And Operator Capital Product Partners Revised To #BB-# Rating Affirmed

Stocks and Financial Services Press Releases Thursday September 21, 2017 17:57
LONDON--21 Sep--S&P Global Ratings

LONDON (S&P Global Ratings) Sept. 21, 2017--S&P Global Ratings said today that it has revised its outlook on Marshall Islands-registered vessel owner and operator Capital Product Partners L.P. (CPLP) to positive from stable. At the same time, we affirmed our 'BB-' long-term corporate credit rating on the company.

The outlook revision follows CPLP's closing of a new loan facility of $460 million, which it will use to refinance outstanding bank loans. The transaction will extend and better distribute CPLP's debt maturity profile, with the first large bullet repayment in the fourth quarter of 2023. CPLP will reduce debt by $121 million from cash accumulated after revising the dividend distribution in 2016, demonstrating disciplined treasury management, in our view. Furthermore, we believe EBITDA will likely show resilience, provided charterers deliver on their commitments; and lower debt might lead to a sustainable improvement in CPLP's credit metrics, with S&P Global Ratings-adjusted funds from operations (FFO) to debt higher than 25%, which we consider consistent with a 'BB' rating.

We believe the company's medium- to long-term time-charter profile should help stabilize its earnings over the next 12 months, when we expect soft tanker rates and subdued, albeit recently improved, containership charter-rate conditions. We now see a lower risk of further amendments to CPLP's contracts with its largest charterer, South Korea-based container liner Hyundai Merchant Marine Ltd. (HMM) or a default of HMM. This is because of HMM's financial restructuring, strong support HMM received from the South Korean government, and recovery of freight rates for container liners. We also note that the considerably improved charter rates for tonnage providers (such as CPLP), and the resulting smaller gap between market rates and CPLP's contracted rates makes the charter contracts less prone to amendments. That said, CPLP's current charter rates with HMM are still about 1.5x higher than the market rates.

The key consideration in our assessment of CPLP's business profile is our view of the shipping industry's high risk, owing to its capital intensity, high fragmentation, frequent imbalances between demand and supply, lack of meaningful supply discipline, and charter rate volatility. Further constraints are the company's relatively narrow business scope and diversity--with a focus on the tanker and containership sectors--and its fairly concentrated charterer base--with large exposure to container liners facing prolonged difficult trading conditions in an industry weighed down by overcapacities, sluggish demand, and historically low freight rates.

We consider these risks to be partly offset by CPLP's competitive position, underpinned by the relatively low volatility of profitability, stemming from its conservative chartering policy and predictable running costs. There is limited exposure to fluctuations in operating costs, notably prices of bunker fuel through time-charter contracts, whereby the charterer bears the risk of cost inflation. Furthermore, we recognize CPLP's established and newer fleet (of 36 contracted vessels) than the industry average. In addition, the company's average remaining charter profile duration of 5.5 years provides medium-term visibility on revenues, provided charterers deliver on their commitments.

CPLP's financial profile reflects the company's relatively high gross debt of about $476 million that we forecast at year-end 2017. This results from the underlying industry's high capital intensity, the company's partly debt-funded periodic investment in new tonnage, and large distributions to its unitholders. Furthermore, CPLP will likely pursue the partly debt-financed acquisitions of new tonnage. We believe, however, that the impact from the incremental debt will be largely counterbalanced by higher operating days of new vessels with profitable charter contracts.

CPLP's adjusted ratio of FFO to debt improved to close to 25% in 2016 (from about 22% in 2015), despite a 20% haircut to the charters with HMM from July 2016 and softer tanker rates offset by higher vessel operating days after fleet expansion and debt amortization. We understand that--in conjunction with the announced refinancing to be completed in the fourth quarter of this year--CPLP will reduce debt from accumulated cash reserves and continue amortizing debt from internally generated cash flows. This, combined with likely resilient EBITDA generation of $145 million-$150 million in 2017 and 2018, might result in sustainably stronger credit metrics commensurate with a higher rating.

The positive outlook indicates a one-in-three likelihood that we could upgrade CPLP in the next 12 months because we believe the company's credit measures could sustainably improve to levels commensurate with a 'BB' rating.

We could raise the rating if CPLP continues to amortize debt from internally generated cash flows and we believe it can generate resilient EBITDA through periods of softer tanker charter rates. This also hinges on major charterers (notably HMM and CMA CGM, which together account for about one-third of CPLP's revenue) delivering on their charter commitments, thereby helping CPLP achieve and sustain adjusted FFO to debt of more than 25%.

Furthermore, an upgrade would follow the company's commitment to maintaining a financial policy and credit measures consistent with a higher rating, including continuously prudent use of financial leverage for potential acquisition of new tonnage, and predictable dividend distributions.

Slower debt reduction than we currently forecast, significant deterioration of tanker charter rates below those in our base case, and renegotiations or defaults under existing charter agreements, either combined or on a stand-alone basis, could lead us to revise the outlook to stable.

In addition, unexpected, largely debt-funded investments in new tonnage, large common unit repurchases or extraordinary unitholder distributions, or swings in profitability measures that weaken the company's business risk profile, would likely prevent an upgrade.

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