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Rating Action:

Moody's Upgrades Panama Canal Authority to A1; Outlook stable

11 Mar 2019

New York, March 11, 2019 -- Moody's Investors Service ("Moody's") upgraded the 20-year $450 million Senior Unsecured Bonds issued by the Panama Canal Authority (ACP) to A1 from A2. The outlook is stable.

Moody's rating action reflects ACP's Baseline Credit Assessment (BCA) rise to a1 from a2, as a measure of the rated entity's standalone creditworthiness. The rating action also follows Moody's rating action in which the agency upgraded the Government of Panama's ratings to Baa1, outlook stable. For more information on the Government of Panama please visit moodys.com.

RATINGS RATIONALE

The rating upgrade to A1 reflects the strong performance of ACP after the expansion since its opening in mid-2016. The expansion has brought increased overall tonnage transit and allowed new lines of business. The strong performance of ACP has resulted in better than anticipated financial metrics. Importantly, the rating reflects our improved assessment of the canal's standalone credit profile with the BCA being raised to a1 from a2, which exceeds the A2 sovereign ceiling for Panama. As a result, there is no further uplift to the rating under Moody's joint default analysis framework and government support assumptions.

Over the period 2007-2016 tonnage crossing through the canal showed a relatively flat Compound Annual Growth Rate (CAGR) of 1.0%. After the expansion, and for 2017 fiscal year (October 2016 - September 2017), container tonnage increased by 22% over the same period of the previous year. For fiscal 2018, volumes continued with a positive trend, growing 9.6%.

ACP's solid performance is also supported by a significant increase of Liquefied petroleum gas (LPG) and Liquefied natural gas (LNG) vessels. LPG vessels represented around 3% of total Canal transits before the expansion, increasing their share compared to container ships and accounting for more than 7.9% of transiting vessels. In the neopanamax locks, container vessels represented 48.6% of the transits, followed by LPG transits at 24.5%, and LNG transits at 11.6%, in fiscal year 2018. The Canal captures around 50% of total US LNG and LPG exports and container shippers are deploying the maximum size of vessels allowed in the all-water route through the Panama Canal, a credit positive.

Stronger cash flow generation coupled with a relatively low leverage has resulted in very solid financial metrics. ACP recorded a Cash Interest Coverage close to 15.0x and Funds From Operations to Debt of approximately 55% in fiscal year 2018. These metrics are projected to improve as ACP's cash available for debt service increases and scheduled principal payments, starting this year reduce outstanding debt, even under slow volume growth scenarios. ACP does not have any plans to contract additional debt or major capital projects in its pipeline. The $450 million bonds rank pari passu with a $2.3 billion loan granted by bilateral and multilateral institutions.

The rating of A1 is one-notch above the A2 sovereign ceiling of Panama and three notches above the rating of the Government of Panama (Baa1 stable), implying low risk of moratorium restrictions and capturing the Canal's very strong credit profile with a substantial international component of its revenues. In addition ACP has no reliance on domestic banks or capital markets, close to 80% of its revenue collections are deposited directly into a NY bank account, has legal autonomy from the Panama government, and has international neutrality treaties with the US, among others.

The Panama Canal Authority is a legally autonomous entity of the Republic of Panama established under Title XIV of the country's Constitution. The ACP assumed control of the Panama Canal in 1999, and is exclusively responsible for the operation, administration, management, preservation, maintenance, and modernization of the Canal, as well as its activities and related services. The Political Constitution of Panama also grants the ACP its own patrimony and right to manage the Canal, as well as establishes its status as a for-profit entity.

WHAT COULD CHANGE THE RATING UP/DOWN

Given that the A1 rating is one notch above the A2 sovereign ceiling of Panama, an upgrade of the rating is unlikely in the near term. An upgrade would require that the ACP continues to strengthen on a standalone basis and, importantly, that the sovereign ceiling for Panama is raised.

The rating could face downward pressure if weaker operational performance leads to the deterioration of key financials such that the ACP reports Cash Interest Coverage below 8.0x or Funds From Operations to Debt below 30%. Any changes to the legal status of the Panama Canal Authority that affects its autonomy or any weakening of the corporate governance practices of the canal could also exert downward pressure on the ratings.

The methodologies used in this rating were Privately Managed Port Companies published in September 2016, and Government-Related Issuers published in June 2018. Please see the Rating Methodologies page on www.moodys.com for a copy of these methodologies.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Adrian Garza
Vice President - Senior Analyst
Project Finance Group
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Mexico
JOURNALISTS: 1 888 779 5833
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A.J. Sabatelle
Associate Managing Director
Project Finance Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
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JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
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