The Panama Canal will next month seek a credit rating, prior to raising more than $2 billion in debt finance for new locks. Moody’s rating agency says the canal’s debt could pierce the sovereign ceiling and reach investment grade.
Jose Barrios, deputy administrator and cfo of the Panama Canal Authority (ACP), confirmed to Emerging Markets that talks with two major rating agencies will now begin. The Authority expects to initiate the process, which takes roughly six months, around July once its financial plans are “well grounded.”
The $5.25 billion locks project will require borrowings of $2 to $2.3 billion, and initial tranches must be in hand by 2009 when the seven-year construction project hits its peak, Canal officials have said. The project’s financial plan is expected to be released late in the year.
Credit ratings are a critical component in determining the cost of financing, and the ratings will be the Canal’s first ever, as it has never issued debt in its 93-year history.
The Canal will seek to improve on the sovereign rating of Panamanian government bonds, which are rated below investment grade by all three leading agencies, Fitch, Moody’s and Standard & Poor’s.
One means for the ACP to transcend the sovereign rating would be to hold some of the Canal’s hard currency earnings from tolls offshore, where the funds could secure borrowings, Gersan Zurita, senior director of project finance at Fitch Ratings, said. “Offshore accounts will be a basic requirement.”
There may be other ways to ratchet the ACP up to investment grade. In 2001, Moody’s devised a method for piercing the sovereign ceiling, that it applies following financial crises in which governments defaulted but did not impose a general debt moratorium.
Moody’s has granted above-sovereign ratings to 80 issuers worldwide in recent years. These are typically companies that earn large amounts of hard currency revenues – including, in Latin America, Petrobras, Embraer, AmBev, Companhia Vale do Rio Doce and YPF.
The Panama Canal could be eligible for such treatment, Moody’s Panama analyst Alessandra Alecci told Emerging Markets. “Based on our assessment of the support that the government would grant the Panama Canal in a potential situation of distress, it is possible that the Panama Canal rating could be higher than the government bond rating and possibly, the country ceiling,” she said.
Moody’s rates Panama ’s government bonds Ba1 and has determined the country ceiling, or the highest rating in Panama at Baa1, two notches above investment grade.
Panama could help the Canal’s credit rating by “trying to get the sovereign rating up as quickly as possible,” Carl Ross, head of emerging markets research for Bear Sterns in New York , said. The government’s rapidly shrinking fiscal deficit and improved tax collections make for fiscal performance that could merit an upgrade, he suggests.
If the canal authority, a semi-autonomous government agency, seeks a stand-alone rating rather than a rating on individual bond issues, it would be impacted by issues such as government interference with the Canal as a commercial entity, says Lisa Schineller, director of sovereign ratings for Standard and Poor’s.
Panama reported a primary surplus for 2006 of 0.5% of GDP, the first time in 10 years the government has shown a surplus. “Bringing down the debt burden and moving toward lower fiscal imbalances are key for upgrading,” Schineller said.