DP World faces low refinancing pressure this year

Near-term refinancing pressure on Dubai Ports World is low as the company's debt is mostly long-term in nature, a new research has said.

DP World's debt is largely comprised of a $1.5 billion (Dh5.5bn) sukuk and a $1.75bn bond. Over the next three years, the global ports operator has less than $1bn of principal repayments on loans, with the next large debt falling due being the $1.3bn revolver maturing in 2012.

The company's liquidity position remains comfortable, with $2bn in unused credit facilities, according to a credit research by Standard Chartered bank.

"We initiate coverage of DP World with a stable credit outlook," Standard Chartered credit analyst Simrin Sandhu said. "As a flagship enterprise of the emirate of Dubai, DP World enjoys strong sovereign support. While there are no formal guarantees on the bonds, the government has extended support to the company in the past by offering a 99-year concession at the Jebel Ali facility, undertaking infrastructure development at the port and providing funding for large acquisitions by the company in the past.

"We like DP World on account of its well-diversified revenue base, strong cash flow and importance as a key asset in Dubai's strategy of promoting economic development and diversifying the economy away from oil."

One of the risks to spreads on DP World's debt comes from "the wider Dubai credit universe", Sandhu said.

Dubai's corporate refinancing requirements this year are expected to touch $15bn, credit rating agency Moody's Investors Service said last month. This is nearly half of the total refinancing requirements of the GCC, estimated at $33bn. The UAE's total refinancing requirements were put at $19bn. Moody's affirmed that Gulf governments are well placed to respond to these challenges.

Dubai International Capital Chief Executive Sameer Al Ansari said in November that Dubai's debt-to-GDP ratio was at better levels than in many other countries.

"In a year's time, it will look better. I know the resources are there," he said, brushing off speculation that the emirate may need to seek help to meet its obligations.

Borse Dubai said last month it is "very optimistic" about refinancing a $2.5bn package, a sign that interest rates have returned to levels companies are willing to accept.

The owner of Nasdaq Dubai needs to replace a one-year syndicated loan taken out last year to pay for the purchase of Swedish exchange OMX.

Other risks associated with DP World's debt include the larger slowdown in the container terminal business in the current environment, Standard Chartered said, "a large part of [which] is priced in".

"We like the two DP World bonds – both of which are long-dated, low-dollar-price assets and offer attractive convexity," Sandhu said. "Given that the cash curve is fairly flat, we recommend the 2017s, although the 2037s offer better convexity."

INVESTING CASH

DP World's net debt increased from $2.6bn at the end of 2007 to $4bn as of June 30, 2008, largely due to the spending on acquisitions and capital expenditure on expansion.

The company has been investing cash to fund the recently completed acquisition of the ports of Sokhna in Egypt and Dakar in Senegal as well as its increased ownership of ports in Chennai, India, and Karachi, Pakistan.

"However, leverage levels are relatively moderate with debt/Ebitda at 3.83x as of June 30. While the company had planned to double capacity by 2017 with an estimated capex outlay of $4.2bn until 2011, all capex and financing plans are now being revisited given the current economic environment," the credit report said.

DP World, one of the world's largest port operators, is 80 per cent-owned by the Government of Dubai via Dubai World. The remaining 20 per cent is listed on Nasdaq Dubai following a $3.2bn IPO in 2007, the largest public offering in the region to date.

With the acquisitions of CSX World Terminals for $1.2bn in 2005 and Peninsular and Oriental Steam Navigation Company (P&O) for $6.9bn in 2006, DP World cemented its position as one of the most geographically diversified container terminal operators in the world.

MORE PROFITABLE

Origin and Destination (O&D) cargo comprises 76 per cent of DP World's total throughput. By comparison, transshipment accounts for the bulk of traffic for competitors Port of Singapore Corp and Hutchison Port Holdings at their main ports of Singapore and Hong Kong, respectively.

"O&D is a more profitable business due to greater pricing power and tends to be a more stable revenue source than transshipment given the reduced risk of losing cargo to a competitor port," Sandhu said.

Given the nature of its business, DP World remains vulnerable to the downturn in the global economy and the resulting slowdown in world trade, the bank said. After posting very strong growth in the first half of 2008 (revenues up 32 per cent year-on-year), volumes slowed in the latter half of the year with some ports outside of the Middle East posting negative growth.

For 2008, the company expects to deliver strong financial results, with profits of $675 million, up 33 per cent from 2007. However, it expects 2009 to be challenging for the industry and intends to focus on cost reduction and cash conservation.

While the industry will undoubtedly be under significant stress this year, it is still expected to post moderate growth. Drewery Shipping Consultants is forecasting container traffic growth of 2.8 per cent in 2009.

DP World has limited exposure to the West with over 65 per cent of its revenues coming from markets in the Middle East and Asia.

"This portfolio composition should help insulate the company to some extent from declining revenues as its core markets are expected to continue to post positive, albeit slowing, growth," Sandhu said.

"In addition, its break-even capacity utilisation levels are low at approximately 40 per cent, while the company has been operating at utilisation levels in excess of 80 per cent.

"Thus, there is significant headroom for volume contraction and unless throughput falls drastically, we do not expect DP World to post operating losses," Sandhu said.

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