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Panama Canal's Economic Performance, and Funds Transfers to the Government

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Canal gives record $1.703 billion to State

Jorge Luis Quijano
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A record  $1.703 billion contribution to the State, by  The  Panama Canal Authority (ACP), was approved by the Board of Directors on Thursday, December 13.

“It was a year of many challenges that could be overcome with a growth in tonnage,” said administrator Jorge Luis Quijano,

The contribution comes from  $1.199 billion of surplus for the fiscal year 2018, which closed on September 30, plus  $502  million of transit tonnage and more than  $2 million for services rendered to the Canal.

The figure represents an increase of $44 million compared to the budgeted contribution and was an increase of  $53 million on the previous contribution.


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Panama Canal revenues up 9.1%

Postpanamax ships using new locks
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Panama Canal revenues climbed 9.1 percent to $2.082 billion between January and October, up from  $1.908 billion in the same period of 2017, according to official statistics released Monday. 

October was the month with the best performance in the period, with revenues of $217.68 million2.74% more than the $211.76 million in September

In the first 10 months of this year the Canal, which accounts for around 6% of world trade, recorded a total of 11,504 transits, 0.89% more than the 11,401 of the same period of 2017.

Between January and October, 2,160 transits were made by Neopanamax vessels through the new Canal locks, 31.2% more than the 1,646 in the same period of 2017.


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Panama Canal revenues grow 8.5% in 2018

Wed, 02/06/2019 - 16:39

Diseño sin título (14)_0.jpg

Panama Canal revenues totaled 2,513.2 million dollars in 2018, 8.5% more than the 2,316.3 million of the previous year, according to figures from the Institute National Statistics and Census (Inec) released on Wednesday.

The revenue increase of 2018 is less than the 17.6% of the previous year, a performance deemed extraordinary by the Panama Canal Authority (ACP), which was the product of the full operation of the extension of the road, which entered service to mid 2016

Regarding the results of 2018, the preliminary figures of the statistical entity specify that last December was the month with the highest revenues for the interoceanic route, with 220.8 million dollars, 2.8% more than in the same period of 2017.

But the biggest monthly rise was recorded in May, with 16.1% of total revenues of 216.5 million dollars compared to 186.5 million dollars in the same month of 2017, said the Inec.

The transit of ships through the Canal, where about 6% of world trade passes, came in 2018 at 13,692, 0.2 percent more than the 13,666 the previous year, indicated preliminary official data.

For the new interoceanic canal locks, which give way to ships with triple the load that crosses them through the centennial canal, a total of 2,643 high-draft transits were recorded, above the 2,025 of the previous year.

The ACP approved last December to deliver to the Panamanian State 1,703 million dollars corresponding to fiscal year 2018, a "historic" contribution for the public coffers, and 53 million dollars higher than the one granted the previous year.

The administrator of the channel, Jorge Luis Quijano, explained then that it was foreseen to deliver to the National Treasury 1.659 million dollars, but that another 44 million were added due to the "spectacular" performance of the interoceanic route during fiscal year 2018.

"This year is a record year and for the first time we passed the barrier of 1,700 million dollars in contributions to the State", said the top manager of the interoceanic highway, which connects more than 140 sea routes and 1,700 ports in 160 countries.

The Panama Canal reported Wednesday that it has been applying water saving measures for several months in the face of the possibility of the dry season lengthening and aggravating the El Niño weather phenomenon, which causes severe droughts and whose effects in Central America were especially serious in 2016.

"The Panama Canal Authority, since before (the beginning of) the phenomenon of El Niño in November, implemented a program of water conservation in the locks", said the Executive Vice President of Environment, Water and Energy of the interoceanic route, Carlos Vargas.

The program, the executive explained, includes "cross-flooding of locks", "intensive use of tubs" and the temporary closure of a hydroelectric plant in the canal "to prevent that water leave the system".

The interoceanic road, through which passes about 6% of world trade, operates with lock systems at different levels, which require 202,000 cubic meters of water each time a ship passes.



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Third Canal locks produce 50% of toll income


Posted 19/05/2019

Income from the third set of locks is living up to predictions and is already generating almost half of the Canal toll revenue with the transit of postpanamax ships.

According to the Panama Canal Authority (ACP) , in the first seven months of fiscal year 2019 (ie, from October 1, 2018 to April 30, 2019) the tolls collected by the old structures, which allow the Panamax step, added $802.2 million or 52.5%, while the new locks have produced $723.7 million or 47.4%.

The trend is that the third locks opened in 2016, will become a bigger income generator.



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Panama Savings Fund heading for record


US-China trade war the only cloud

Posted 20/05/2019

The returns accumulated by The  Panama Savings Fund (FAP) returns will be capitalized, at the end of the year  and should set an historical record if canal transit is not seriously damaged by the US-China trade war

The capitalization follows s the legal reform approved in October 2018. Before this legislation, the yields of the FAP were delivered to the National Treasury. The measure of capitalizing the fund with the profits it generates will allow its organic growth reports La Prensa.

The accumulation rule was also reformed to allow part of the surpluses generated by the  Panama Canal to reach the FAP, which is why it was created.

Taking into account the figures of the 2018 GDP  and the contributions of the Canal to the Treasury and applying the new accumulation rule, the FAP should receive $38 million this year.

The  Ministry of Economy and Finance has indicated that its  intention is to make the  transfer before the end of the current administration on June 30, but  so far the FAP has not received the contribution

Increasing yield
The difference in the profit obtained by the FAP during the first quarter compared to the same period of the previous year is considerable. Between January and March 2018, the fund obtained a slightly negative return of -0.22%, which resulted in a loss of $3.9 million.

During the first three months of this year, the fund achieved a yield of 3.84%, which translates into a profit after administrative expenses of $47.8 million.

The FAP, formerly the Trust Fund for Development, was set up with funds obtained from the sale of part of the shares of public companies at the end of the 1990s, including IRHE and Intel. It currently has a portfolio of one thousand $1.322 billion in net assets.

The investments are mainly aimed at fixed-income assets such as sovereign or corporate bonds (61% of the portfolio is invested in this type of assets), while 25% consists of liquid assets and 14% in shares or variable income securities.

This last group of investments was the one that had a better performance in the first quarter, generating a yield of 12.06%, against  the negative yield of -0.55% in the same period in  2018

Investments in fixed income, on the other hand, recorded a positive return of 3.33%, compared to -0.15% obtained in the first quarter of 2018.

The positive result this year is the result of a more moderate policy of the Federal Reserve (FED) of the United States, which has been more patient in the face of possible increases in interest rates compared to the four increases approved in 2018.

"This measure of pausing in the rise in interest rates is well regarded by investors, resulting in the S & P 500 recording its best quarter in more than 20 years, yielding 13.65%," the FAP said in a report.

In addition to monetary policy movements, listed companies have had good results. This makes their actions more attractive to investors and increases their value, explained Abdiel Santiago , technical secretary of the FAP.

Trade war
If the current situation in the markets is maintained, yields at the end of the year could set a  record. The main source of uncertainty today is the trade war between the United States and China, which are applying tariffs to imports, weakening the prospects for trade.

"The actions of the FED will be framed in the economic situation of the country and if an agreement on the commercial dispute is not reached, this factor would incorporate it in the decision to raise or maintain the rates," Santiago said.



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Panama Canal: Risk Rating Confirmed

Because of its financial and competitive strength, the rating agency Fitch Ratings confirmed that the risk rating as an issuer of long-term debt is "A", with a stable outlook.

Friday, August 16, 2019

The ratings reflect an underlying asset that is critical not only for Panama, but also for international trade, as evidenced by its stable volume performance, solid competitive position and well-diversified cargo mix, the ratings company explained.

From Fitch Ratings statement:

Fitch Ratings - Mexico City - 15 August 2019: Fitch Ratings has affirmed the Long-Term Issuer Defualt Rating (IDR) for the Autoridad del Canal de Panama (ACP) and the rating on USD450 million senior unsecurex notes at 'A'. The Rating Outlook is Stable.

The ratings reflect an underlying asset that is critical not only for Panama, but for international commerce, as demonstrated by its stable volume performance, solid competitive position and well-diversified cargo mix, causing ACP´s volume profile to exhibit high levels of resilience. The ratings also reflect ACP's strong ability to modify tariffs that have strategically influenced demand and contributed to steady revenue growth. The ratings also incorporate the legal framework that provides autonomy to the entity, as well as Fitch's view that there are appropriate incentives to keep the asset profitable over the long-run. Despite very strong financial metrics under Fitch's rating case of negative leverage and debt service coverage ratios (DSCR) of over 4x post fiscal year (FY) 2019 that would indicate a higher rating in comparison with Fitch's Rating Criteria for Ports, the rating is constrained at three notches above Panama's sovereign rating (BBB/Stable) given the linkages between ACP and the Panamanian government.

The Stable Outlook reflects Fitch's expectation that the strength of ACP's financial profile will provide more than sufficient financial cushion to withstand the potential adverse effects of a global trade war on its container business, unexpected capex and unfavorable outcomes of outstanding legal disputes at the currently assigned rating level.

Strategic Asset for Global Trade Flows
The Canal is a key player in global trade as it has a privileged geographical position. Over 3% of world maritime commerce transits the Panama Canal. The Canal offers connectivity to world maritime trade, linking the Atlantic and Pacific Oceans, ports, rails and ancillary services, adding value as the main transhipment hub in the region.

Legal Framework Supports ACP's Autonomy
ACP is an entity of the Panamanian Nation established under the Constitution with exclusive charge of operation, management and modernization of the Canal. The risk of government interference is adequately mitigated by ACP's extraordinary legal framework, which provides it with institutional, operational and financial autonomy. Furthermore, incentives are aligned to maintain the Canal's profitability, given moderate reliance of the sovereign on financial contributions from ACP to meet its financial targets, evidenced by ACP's long track record of managing profitable operations through different administrations. Moreover, the rating reflects expectations that the Canal will continue to be managed under the same legal framework.

Strong Market Position - Revenue Risk (Volume): Stronger
The Canal processes a well-diversified mix of cargo types and services a wide array of international trade partners, resulting in a strong demand profile that has exhibited high levels of resilience following global macro trade fluctuations and economic downturns. The Canal's largest business line consists of container cargo between the Eastern United States and Asia. While this sector's industry is competitive, which could cause related volumes to exhibit a moderate level of price elasticity, the Canal benefits from a significant competitive advantage in terms of shipping times and costs over other modes of transit, which has been bolstered even further following the opening of the third set of locks in 2016.

Robust Tariff-Setting Flexibility - Revenue Risk (Price): Stronger
ACP has successfully implemented a toll structure that periodically changes to capture the changing dynamics of the maritime industry. A proactive approach in adjusting tariffs periodically in accordance with varying types of content in cargo and sailing schedules has provided stable cash flow generation. However, shipping line consolidation to improve margins coupled with transport alternatives poses economic challenges to the Canal's pricing flexibility, particularly with regard to its container cargo business.

Modern Facilities, Big-Ship Readiness - Infrastructure Development & Renewal:  Stronger
With completion of the USD5.4 billion major Canal expansion, annual capital investments are expected to be lower in the near term. The Canal's new, eight-year USD2.4 billion capital plan mostly consists of maintenance and strategically related works, including the opening of the Atlantic Bridge that took place in August 2019 and a new Roll-on/Roll-off terminal over the upcoming years. Overall, Fitch considers the Canal's capital funding and planning mechanisms to be strong, evidenced by its ability to fully cash fund all of its needs and maintain good dialogue with relevant parties to continue diversifying its revenue profile.

Some Variable Rate Exposure - Debt Structure: Midrange
Approximately half of ACP's debt is expected to bear unhedged variable rates, causing some uncertainty with respect to the size of future debt service obligations, justifying the midrange assessment, despite its other stronger characteristics. All of ACP's debt is senior, with approximately 85% of outstanding debt exhibiting a fully-amortizing structure while the rest has a balloon structure. Refinancing risk is considered remote given the small portion of balloon debt combined with the relatively small future principal payments relative to ACP's expected cash flow. Bondholders also benefit from very strong financial covenants through 2028 and ACP's healthy cash position.

Financial Profile
In Fitch's rating case, leverage, measured as net debt/cash flow available for debt service (CFADS), is negative with outstanding debt balances being completely offset by cash balances, while DSCR levels are very strong at over 4x once ACP starts to amortize its debt in FY 2019. Despite metrics that are very strong for the current rating category, ratings are constrained as the degree of separation between ACP and the Panamanian government is considered not to fully ring-fence the entity under relevant criteria. This is evidenced by the state ownership of the asset and the appointment of the majority of the board members by Presidents of Panama, although under a stagered regime. Also, while the law dictates that only after all operting costs, including capex, and contigency reserves are funded, the remaining surplus cash can be distributed to the National Treasury, the structure does not have an explicit covenant that needs to be complied with in order to distribute these monies.

Among Fitch's rated transportation portfolio there is no direct comparison for the Panama Canal. However, Harbor Department of Los Angeles (AA/Stable) is comparable given its large scale container operations. ACP benefits from a much larger revenue base and less throughput volatility, but Los Angeles´s throughput volatility is mitigated by a much larger percentage of minimum annual guarantee revenue. ACP´s average rating case coverage levels are higher than that of Los Angeles at 4x or more, though the rating is currently constrained for the aforementioned reasons.

Future Developments That May, Individually or Collectively, Lead to Negative Rating Action:
-    Although unlikely, significant adverse changes in trade policies or the overall macro environment that negatively affect the Canal's volume growth prospects on a sustained basis;
-    A negative rating action on the sovereign rating of Panama;
-    A material change in ACP's autonomy or operational ties with the sovereign through adjustments to the legal framework.

Future Developments That May, Individually or Collectively, Lead to Positive Rating Action:
-    A positive rating action on the sovereign rating of Panama.

In FY 2018 (ended Sept. 30), tonnage performance grew over 9%, reflecting the Canal´s first two full years following the opening of the third set of locks in June 2016, which has permitted vessels of much greater capacity to pass through the locks. Canal revenues and transit tons have grown at a CAGR of 13% and 16%, respectively, since the opening of the third set of locks. For the first ten months of FY 2019, tonnage levels have continued to grow following the opening of the new locks, particularly within the container and LNG segments, with total cargo growing by 4.4% overall.

Strong growth in cargo volumes has driven revenue outperformance relative to Fitch´s base case expectations. Specifically, FY 2018 and FY 2019 (October 2018 - July 2019) toll revenues grew by nearly 11.0% and 2.7% versus Fitch´s expectations of 8.5% and -1.1%, respectively.

In addition to toll revenue outperformance, expenses were also lower than expected and cash balances were higher in FY 2018, causing net debt leverage metrics to improve significantly to -0.2x from expectations of 0.7x in Fitch´s base case.

In 2018, the U.S. imposed three rounds of tariffs on more than USD250 billion worth of Chinese goods; the duties of up to 25% cover a wide range of products. China retaliated by imposing tariffs from 5% to 25% on USD110 billion of U.S. products. On Aug, 1, 2019, the U.S. announced it would impose a 10% tariff on a further USD300 billion in Chinese imports. The new duties will be imposed beginning Sept. 1, 2019. Given that roughly 70% of cargo processed through the Canal is either destined to or from the United States, ACP´s volume profile could be adversely affected in the event that the aforementioned developments translate into lower volumes transported between these trade partners. Additionally, in January 2020, the new emission standards set by the International Maritime Organization (IMO) aimed at reducing the current 3.5% sulphur cap on fuel to 0.5%, will be enforced. Although ACP has already undertaken a series of initiatives to position the asset at a competitive advantage, Fitch has incorporated conservatism into its forecasts in order to account for the potential of lower or declining future volume performance, but acknowledges that significant uncertainty continues to exist that could cause volumes to exhibit worse performance than assumed.

Outstanding claims related to the construction of the third set of locks remain, on behalf of Grupo Unidos por el Canal, S.A. (GUPCSA), the consortium responsible for their design and construction. These claims relate to concrete works, lock gates and disruption related issues, among others. As of the end of FY 2018, GUPCSA filed 119 claims, of which 41 have been resolved and cancelled and ACP´s contingent liability related to these claims was USD5.5 billion. However, the final outcomes of the legal proceedings are not expected to materially affect ACP, and Fitch considers the Canal´s financial position sufficiently strong to offset potentially unfavorable outcomes.

Fitch Cases

In both of Fitch´s cases, Fitch has considered ACP´s financial performance in FY 2019 to date with no revenue growth incorporated through the end of the fiscal year. No future toll increases are considered. Cash balances are expected to remain flat from FY2019. Fitch does not consider any litigation payment for claims related to construction of the third set of locks.

Following FY 2019, Fitch´s base case assumes revenue growth averaging 0.7%, with a 2.0% growth in FY 2020 that gradually decreases thereafter, reflecting lower growth due to the current trade environment. Expenses grow in line with projected Panamanian inflation and volume growth.
Fitch´s rating case following FY 2019 assumes revenue growth that follows the same trend as the base case, but with a lower average growth rate at 0.0%, which is considerably more severe than ACP´s historical revenue performance but considered warranted given aforementioned concerns. Expense growth is slightly lower than in the base case, given lower expected volume growth, consistent with ACP´s financial structure and historical performance.

The mentioned assumptions yield strong metrics in both cases, evidenced by healthy average DSCR levels of 4.7x in the base case that decline to 4.37x in the rating case. Net leverage metrics remain negative in both cases, and gross leverage metrics remain low, at 1.41x in the base case and 1.43x in the rating case. Projected leverage metrics are similar to those in last year´s review, primarily due to Fitch´s assumption that ACP will not issue additional debt or significantly deplete its cash balances in order to allow transfers to the sovereign to continue to be maintained at levels projected before FY 2021 and FY 2022, given management's expectations to fully fund all capex needs with cash flow or reserves. However, Fitch expects that in the event that EBITDA performed at a much lower level than projected, ACP would take action either by increasing tolls and deferring or debt-funding capex in order to maintain the growing trend of transfers, as has typically been the case historically.

In comparison with Fitch's Rating Criteria for Ports and relevant peers, these metrics would be consistent with a higher rating, but the rating is limited by the lack of robust contractual ring-fencing between ACP and the sovereign, capping the rating at three notches above that of Panama.

Criteria Variation
For this transaction, a criteria variation was applied on the Government-Related Entities Criteria. This methodology establishes that for projects with a stronger standalone credit profile than that of the government parent, the relevant considerations of the Parent and Subsidiary Linkage criteria will be applied to determine relative notching. The weak linkage between ACP and the government of Panama and the ring-fencing characteristics of the Canal would normally only provide for a two-notch uplift above the sovereign rating. However, the very unique nature of the asset given its strategic importance to world commerce, extraordinary legal framework and existence of appropriate incentives to keep the asset profitable over the long-run have led Fitch to determine that these characteristics add considerable financial strength to the entity and therefore support the positioning of the rating at three notches above the sovereign rating of Panama.



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