Moody's: Strong market positions support credit profiles of Australian ports

Moody's Investors Service says that the credit profiles of the ports servicing Australia's state capital cities benefit from their provision of an essential service and high barriers to entry.

"These ports benefit from their strong market positions, a resilient domestic macro-economic environment -- albeit with rising downside risk -- revenue diversification and generally favorable state-based regulatory regimes," says Arnon Musiker, a Moody's Vice President and Senior Credit Officer. "These factors support the ports' credit profiles."

"The state capital ports are the trade gateways to their respective service areas due to their proximity to, and strong transport links with capital cities, where Australia's population and consumer demand are concentrated," says Musiker.

Moody's conclusions were contained in a just-released report, "Australian Infrastructure: Australia's State Capital Ports: Strong Market Positions Support Credit Profiles".

The report follows the announcements by two state governments of plans to privatize their wholly-owned port companies, Port of Melbourne in Victoria and Fremantle Port in Western Australia.

The large geographic distances between the capital city ports further strengthens their market positions, while the considerable expense of developing greenfield ports and the associated environmental hurdles means that barriers to entry for potential new entrants are very high.

"However, increasing uncertainty in the macro-economic environment is a key challenge for the sector", says Musiker, adding "As such, maintaining a prudent profile is key to navigating through these challenges".

Moody's notes that the prevailing state-based regulatory environment for ports in Australia is credit supportive because it is light-handed and, as such, does not impose tariff caps in relation to services.

However, if the Australian Competition and Consumer Commission's view that governments need to consider up-front economic regulation of major container ports obtains a wider currency, then heavier handed regulation involving regulatory approval of tariffs is possible, although not Moody's central scenario.

The report further says that factors that will determine port credit profiles after privatization include: (i) the terms and conditions of the concessions under which the private sector obtains control of the assets; (ii) the new owner's track record and strategy, which will drive operating risk; (iii) target financial policies, including the funding mix and distributions; iv) capital expansion requirements and associated execution risk; and v) the ability and willingness of the new owners to provide support to the business if required.

The report also includes a comparison of the ports with other rated Australian infrastructure assets and rated overseas ports.