Panama Canal Rating Downgrade

Due to the deterioration of fiscal indicators resulting from the severe economic impact of the pandemic, Moody's downgraded the Panama Canal Authority's senior unsecured debt rating from A1 to A2.

Monday, March 22, 2021

Given that the A2 rating is three notches above Panama's Baa2 sovereign rating, a rating upgrade is unlikely in the near term. An upgrade would require the ACP to continue to strengthen independently and Panama's sovereign rating to be upgraded, the rating agency said.
 
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From Moody's report:

New York, March 18, 2021 -- Moody's Investors Service, ("Moody's") downgraded to A2 from A1 the senior unsecured debt rating assigned to Panama Canal Authority ("ACP"). Moody's also changed the rating outlook to stable from negative and lowered the Baseline Credit Assessment, a measure of ACP's standalone creditworthiness, to a2 from a1.

The ACP credit quality is underpinned by the robust institutional framework, corporate governance and international treaties that ensure its operation without interference. The A2 rating is three notches above the Government of Panama's (GOP) sovereign rating (Baa2 stable). The rating reflects a long history of operations free of political interference; its solid corporate governance; and rules that ensure the maintenance of prudent business management. Notwithstanding, Moody's rating action reflects that ACP's creditworthiness cannot be completely de-linked from the current stresses facing the government, economy and population of Panama.

The credit quality of the ACP reflects the distinctive position of the Panama Canal as an infrastructure asset with a unique geographic advantage and business model. Despite the coronavirus pandemic and US-China trade tensions, the ACP's operational and financial performance has been strong, supported by the recent expansion and a new tariff scheme.

For fiscal year 2020 (October 2019 -- September 2020), the Panama Canal registered slight growth relative to the previous fiscal year of 2.6% in transits, 1.1% in PC/UMS (Panama Canal/Universal Measurement System) tonnage and 0.7% in cargo tonnage. For fiscal year 2021, we expect continued growth, but operating performance will still be lower than 2019 levels. Nonetheless, Moody's projects that financial performance will remain very strong, with ACP recording Funds from Operations (FFO) to Debt ratio above 60% and Cash Interest Coverage above 14x for 2021.

Given that the A2 rating is three notches above the Baa2 sovereign rating 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 that the sovereign rating for Panama is upgraded.

The rating could be downgraded as a result of a similar action on the sovereign rating. The rating could also face downward pressure if weaker operational performance leads to a deterioration of key financials, such that the ACP reports cash interest coverage below 8.0x or funds from operations/debt below 30%. Any changes to the ACP's legal status that affect its autonomy or any weakening of its corporate governance practices could also strain the ratings.



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