July 17, 2014 [OPIS] - Houston Fuel Oil Terminal Company has received a Ba2 rating from Moody's Investors Service, reflecting the highly contracted nature of the cash flows, the low operating risks associated with this storage asset, its strong market position and its strategic location at the mouth of the Houston Ship Channel.
The rating also considers the credit quality of the contract counterparties, the contract diversification and HFOTCO‘s track record in renewing expiring contracts and in adding new customers.
The Ba2 factors in management’s generally conservative approach for expanding capacity, which includes securing contracts prior to spending growth capex.
However, the Ba2 rating also reflects the very high total leverage. At financial close, HFOTCO’s total funded debt will reach $775 million resulting in debt to expected 2014 EBITDA to be 8.75x, an increase from 2013 levels of 7.3x.
Moreover, based upon the Moody’s Base Case, which assumes a lower recontracting rate, the ratio of FFO to Debt (after adjusting for maintenance capex) to average around 8% which is in line with the Ba rating category under Moody’s Generic Project Finance Methodology.
This high leverage is permanent as debt repayment is limited to the 1% scheduled amortization, resulting in substantial refinancing risk.
Creditors benefit from having all of the debt at the Operating Company (OpCo) level and from a collateral package that includes a perfected security interest in all the assets of HFOTCO.
However, secured creditors are effectively subordinated to $225 million of unrated, super senior Hurricane Ike Bonds, which mature in 2050. While the existence of hard, tangible asset collateral is an enhancement for creditors relative to the Buffalo financing at the holding company, the lack of any structural enhancements, including financial covenants, weaken creditor protections.
HFOTCO‘s stable outlook reflects the expectation that the diversified portfolio of contracts will generate relatively stable and predictable cash flows, as the cash flows are derived from medium term contacts with predominately investment grade counterparties.
Alinda owns HFOTCO through Alinda Infrastructure Fund II and Alinda Infrastructure Parallel Fund II, LP (collectively, Alinda Fund II). Alinda Fund II is an approximately $4.1 billion investment fund, which is focused on investing in infrastructure assets, including energy infrastructure, telecommunications infrastructure, transportation and utilities. Alinda has made over $8 billion of equity investments in infrastructure during the last eight years.
