The newly floated company PD Ports plc plans to repurchase two classes of notes from a 2001 whole business securitization called THPA Finance Ltd. - a move that prompted some debate last week from key players in the deal.
The GBP305 million ($558 million) deal is backed by operations at the port of Tees and Hartlepool in northeast England.
The structure allows for the parent company to pay dividends from the securitized business to its equity investors, after it redeems all of the Class A1 notes due 2011 and Class C notes due 2031.
PD Ports announced last week its plan to repurchase the two classes of floating-rate notes by Sept. 15, the next interest payment date.
Deutsche Bank Securities, the underwriter, put a positive spin on the news, saying the plan is "clearly positive" for the remaining bondholders as the deal will de-lever appreciably.
But just as Deutsche Bank predicted, rating agencies took a more cautious view, expressing concern about a future hike in the debt-service obligation.
Standard & Poor's - which put all four classes of the deal on credit watch negative July 9, because of uncertainties surrounding the sale of the parent company - said the new ownership and debt structure might weaken the position of the bondholders.
Fitch Ratings, meanwhile, sounded even less enthused about the redemption, but left its original ratings in place. "Despite the overall de-leveraging of the transaction, we view this event as credit negative, given loss of effectiveness in the covenant package and future step-up in the debt service profile," said John Keane, Fitch's head of whole business securitization.
Both S&P and Fitch rated the four-tranche deal, assigning an A' to the A1 class senior notes, originally totaling GBP60 million ($109 million) and paying 95 basis points over six-month Libor, and the GBP145 million ($265 million), similarly rated A2 fixed-rate class due 2024, paying a 7.13% coupon. The BBB' rated Class B, worth GBP70 million ($128 million), is due 2031 and pays 8.24%. The BB' rated junior notes, totaling GBP30 million ($54.9 million), pay 600 basis points over Libor.
In a deal update last week, Ganesh Rajendra, managing director and head of European securitization research for Deutsche Bank, said the "surprise" move by PD Ports had more to do with appeasing the rating agencies than improving the balance sheet. Rajendra also said that after the redemption, the leverage on the remaining notes will be more consistent with ratings one or two notches higher.
But Stuart Nelson, an associate on S&P's structured finance ratings team, said leverage is not the only concern. "If you were purely looking at a debt-to-EBITDA multiple, then that could be a fair point," Nelson said. "Our concern is we rate these transactions to term and also on a projected cashflow basis. We're not purely looking at that position today, but what that position may be in the future."
Nelson said debt service obligations get more onerous in 2011 and the rating agency is concerned about how free cashflow will be deployed in the meantime. S&P would like to see a policy ensuring bond and equity stakeholder interests remain aligned, in case there is a debt service payment crunch.
Fitch raised similar concerns, with Keane pointing out that performance in the transaction can deteriorate to a greater degree without triggering the financial covenant than if the prepayment had not been made.
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