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Rating Action:

Moody's downgrades Naviera's CFR to B3; outlook negative

27 Feb 2020

Senior Secured notes ratings downgraded to B3 from B2

Paris, February 27, 2020 -- Moody's Investors Service (Moody's) has today downgraded the corporate family rating (CFR) of Bahia De Las Isletas, S.L. (Naviera), a holding company owner of Spanish ferry operator Naviera Armas, to B3 from B2, and its probability of default rating (PDR) to B3-PD from B2-PD. At the same time, Moody's has downgraded Naviera Armas, S.A.'s senior secured notes to B3 from B2. The outlook for both entities remains negative.

RATINGS RATIONALE

Today's rating action reflects Moody's expectation that the company's liquidity profile is more stretched than initially forecasted by the rating agency. Moody's believes that Naviera's liquidity over the next 12-18 months will rely on bank financing for its scrubbers, still to be finalized, and asset disposals for it to remain adequate. While Naviera has identified two vessels that it intends to sell prior to the end of 2020, and it has evidenced its ability to sell vessels in the past, Moody's believes that if macroeconomic conditions or operating fundamentals deteriorate, then the funds that the company may be able to raise from vessel sales will be lower than the company expects, or that asset sales may not occur on a timely basis to ensure sufficient liquidity at all times.

As at 30 September 2019, Naviera had around EUR40 million of unrestricted cash on balance sheet, but had fully drawn its EUR31 million revolving credit facility (RCF). Moody's expects that the disposal of a vessel for EUR35 million in December 2019 will have eased some strains on the company's liquidity towards the end of 2019, and will have allowed the company to partly repay its RCF and avoid the testing of its financial maintenance covenant of 5.5x net debt/EBITDA, which is only tested at year end when the RCF is over 40% drawn.

However, liquidity will remain tight through 2020. Besides raising debt for its scrubbers and completing asset sales, Naviera's liquidity is also dependent on a strong recovery in earnings to limit the negative free cash flow (FCF) generated in 2020. In particular, this improvement in EBITDA is contingent on the company's ability to achieve cost synergies with Trasmediterranea, S.A. in a timely fashion and the reduction of one-off implementation costs. While the company has evidenced its ability to already generate synergies in 2019 from the transaction, Moody's considers that there are still some execution risks associated with this. The amount of targeted synergies -- EUR50 million - are sizeable in the context of the combined business -- revenues of EUR624 million - and the company has not demonstrated a good track record over the last 12-24 months in terms of being able to forecast its EBITDA and FCF, especially since the acquisition. Towards the end of 2018, Moody's expected that Naviera would generate a reported EBITDA of over EUR110 million in 2019. Moody's now expects that based on Q3 2019 results that 2019 reported EBITDA (pre-IFRS 16) will be in the region of EUR65 million.

The improvement in EBITDA and FCF is important over the next 12-18 months in order for the company to repay its current drawings under the RCF and finance its day-to-day working capital and capital spending needs. In particular, EBITDA growth and repayment of RCF drawings will be key in ensuring that there will be no breach of the company's financial maintenance covenant as at the end of 2020. The company's net leverage was 5.6x as at 30 September 2019, which evidences, if more than 40% of the RCF is drawn, that there is no headroom under this covenant if EBITDA does not grow. In addition, Naviera's RCF will mature in July 2021 and in order to refinance this facility, Moody's believes that the company would need to have a track record of stronger earnings and a sustainable capital structure. Moody's estimates the company's adjusted debt/EBITDA will be around 8.5x in 2019 based on the weaker earnings generated in the first 9 months of 2019 and Moody's considers that deleveraging to around 5.5x can only be achieved if the company is successful in improving its underlying EBITDA and in reaching the expected synergies.

Naviera's B3 CFR continues to reflect (1) the company's well-established market positions, with a large ferry fleet and multiple routes creating some barriers to entry; (2) the still supportive macroeconomic conditions and favorable tourist environment; (3) the company's prospects of profitability improvement and earnings growth, assuming that the company achieves the synergies it forecasts over the next 18 months; and (4) Moody's expectations of modest fuel prices, which should support earnings in the next 12 months.

ESG CONSIDERATIONS

Naviera's rating incorporates environmental, social and governance (ESG) considerations, in particular the large capital spending needed to comply with the IMO 2020 regulation, which Naviera has had to comply with since 1 January 2020. This regulation bans ships using fuel with a sulfur content higher than 0.5%, compared with 3.5% in the past, unless a vessel is equipped to clean up its sulfur emissions. Moody's expects this regulation may lead to increased operational costs, from the use of lower-sulfur fuels, or increased capital spending to equip vessels with scrubbers to clean up exhaust emissions. The rating also takes into consideration the company's less conservative financial policy, as illustrated by its high leverage and the large investments made in recent years to expand the fleet.

RATIONALE FOR NEGATIVE OUTLOOK

The negative outlook reflects Moody's concerns over Naviera's ability to restore its liquidity in the next 12 to 18 months, notably the execution risks around the release of the planned synergies and the achievement of asset disposals. The negative outlook reflects the company's weak credit metrics expected for the next 18 months, absent material improvement in earnings or asset disposals.

WHAT COULD CHANGE THE RATINGS DOWN/UP

Upward pressure is unlikely following today's rating action. However, over time, Moody's could upgrade the ratings if Naviera: (1) successfully achieves the synergies planned as part of the integration of Trasmediterranea; (2) displays a positive and recurring free cash flow generation; (3) and displays an adequate liquidity profile. Quantitatively, stronger credit metrics such as a Moody's adjusted (gross) debt/EBITDA below 5.5x on a sustainable basis and Moody's-adjusted EBIT/interest expense comfortably above 1.5x could trigger an upgrade.

Conversely, Moody's could downgrade the ratings if Naviera's operating performance weakens and deviates from Moody's current expectations. Downward pressure could also be exerted if the company fails to secure sufficient liquidity to finance its operations, for example if bank financing for scrubbers or vessel sales are not forthcoming.

Quantitatively, downward pressure could arise if free cash flows continue to be meaningfully negative and that liquidity weakens further from current levels (EUR40 million of available cash resources, including committed credit lines, of as 30 September 2019). Failure to bring adjusted (gross) debt/EBITDA below 6.5x or EBIT/interest expense above 1.0x in the next 12-18 months could also trigger a downgrade.

STRUCTURAL CONSIDERATIONS

The B3 ratings (LGD3) on the issuer's EUR300 million senior secured notes due 2024 and the EUR282 million senior secured notes due 2023 are in line with the CFR. This reflects the notes' position in the capital structure behind the committed EUR31 million super senior RCF.

The senior secured notes and RCF benefit from a guarantor package, including upstream guarantees from Naviera Armas, S.A. and guarantor subsidiaries, representing more than 100% of the company's EBITDA. Both instruments are also secured on a first-priority basis by certain share pledges, pledges of certain insurance claims and mortgages over five vessels. However, the senior secured notes are contractually subordinated to the RCF with respect to the collateral enforcement proceeds.

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Shipping Industry published in December 2017. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Headquartered in Las Palmas, Naviera is a Spanish ferry operator. The company provides passenger and freight maritime transportation services mainly in the Canary Islands and Balearic Islands (between islands and to/from the Iberian peninsula). At end-September 2019, Naviera operated a fleet of 23 wholly-owned vessels as well as 13 additional ferries chartered in. The company also operates the largest land transportation business in Spain with a fleet of more than 500 trucks. In the 12 months to 30 September 2019 the company reported consolidated revenues of EUR624 million and an EBITDA of EUR63 million. The company has been operating for over 75 years and remains under the Armas family ownership.

REGULATORY DISCLOSURES

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security 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.

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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.

Guillaume Leglise
AVP-Analyst
Corporate Finance Group
Moody's France SAS
96 Boulevard Haussmann
Paris 75008
France
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Jeanine Arnold
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Releasing Office:
Moody's France SAS
96 Boulevard Haussmann
Paris 75008
France
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

No Related Data.
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