RPT-Fitch Affirms Transurban at 'A-'; Outlook Stable
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Dec 16 (Reuters) - (The following statement was released by the rating agency)
Fitch Ratings has affirmed Transurban Finance Company Pty Limited's (Transurban) senior secured bank debt and capital markets facilities at 'A-'. The Outlook is Stable.
The affirmation takes into account the demonstrated resilience of Transurban's road portfolio, the importance of its roads to local transportation networks in Sydney and Melbourne, and the relative stability of the Australian economy.
Transurban has benefitted from this strength with consistent revenue and EBITDA growth, which were 3.5% and 6.2% respectively in FY13. Its network of the M1 Eastern Distributor (A-/Stable), Hills M2, M5 South West Motorway (A-/Stable), Westlink M7 (BBB+/Stable), and the Lane Cove Tunnel make up the bulk of Sydney's orbital road network. In Melbourne the Citylink road (which contributes more than half of Transurban's EBITDA) serves as an importation connection between the city and the primary Melbourne airport as well as to the south-eastern suburbs.
Traffic volumes on Transurban's roads fluctuated between a contraction of 0.9% and growth of 3.4% in FY13 (ending 30 June 2013). Vehicle numbers have been affected by somewhat slower economic growth during the year as the commodity sector has cooled, with real GDP growth of 2.6% for the year (down from 3.4% in FY12). Lower traffic numbers for several of Transurban roads (M5, M2, and Lane Cove Tunnel) are due mainly to asset-specific events such as disruption from road-expansion works. As these events are concluded, we expect that traffic growth will return to a moderate level.
The US portfolio, owned through Transurban's 75% interest in the DRIVe joint venture with CP2, has been less successful to date. In 2012 Transurban wrote off its AUD138m investment in the Pocahontas 895 toll road in Virginia, and is now preparing to hand the asset over to the banks. Traffic on the 495 Express Lanes near Washington DC, which opened in November 2012, is much lower than expected.
The third project is the 95 Express Lanes, which is currently under construction. The DRIVe portfolio currently makes up less than 1% of Transurban's proportional EBITDA.
KEY RATING DRIVERS
Traffic volume is a key rating driver. Road expansion works and somewhat slower economic growth both impacted road usage during FY13, as Transurban saw traffic decrease on the M5 and low single-digit growth on other roads. However following completion of the road works, there is likely to be an initial jump in traffic (due to the return of vehicles that had diverted from the road due to construction) followed by moderate growth. This has already begun to occur following completion of the M2 expansion, with 3Q13 year on year traffic growth above 6% for the M2, Lane Cove Tunnel, and M7. Traffic growth continues to be disappointing across the operating US roads. Fitch has assessed the Volume Risk attribute as Midrange.
Transurban's concession agreements allow it to increase tolls at a rate equivalent to CPI, and in some cases at a higher rate if CPI is below a certain level. While traffic growth has been generally robust across the Australian portfolio, this inevitably creates higher congestion and slower traffic, decreasing the value of using the roads versus competing transportation choices. This will eventually increase price elasticity, making it more difficult to implement the maximum toll increases without incurring traffic declines.
Transurban has so far effectively managed this through road expansion, although that strategy will eventually reach a limit as traffic corridors are fully utilised. Fitch assesses the Price Risk Attribute as Midrange.
Road operations and maintenance is conventional, low-risk work undertaken by experienced contractors. Detailed capital plans with reasonable budgets are prepared by Transurban. Larger projects have been undertaken successfully, both in the US and Australia. The current M5 widening project, being done by Abigroup Contractors Pty Limited under a fixed price and fixed time contract, is on schedule for completion in 2014. Agreements for expansion projects have provided for a level of cost recovery through higher tolls or extended concession periods. Fitch has assessed the Infrastructure Development and Renewal attribute as Stronger.
Transurban's corporate debt portfolio consists entirely of bullet maturities, which introduces an additional level of risk as compared to similarly-rated peers internationally which have amortising debt structures. However Transurban has a proven track record of refinancing its debt well in advance of maturity.
It has also been successful in expanding its lender base across banks and capital markets, as demonstrated by its EUR500m seven-year bond issue in October 2013. The lengthy concession periods for Transurban's roads - the expiry dates range from 2026 to 2087 - help to allow deferral of amortisation at the current time. Transurban maintains a high level of interest rate hedging on its debt portfolio (92% at 30 June 2013), well above the covenanted 75%. It also hedges against FX risk on its non-AUD denominated bond issues. The company also comfortably exceeds the senior interest coverage ratio (SICR) covenant of 2.0x for new debt issuance and 1.25x for lockup/default. The Debt Structure attribute is assessed as Midrange.
Of Transurban's eight operating assets, seven have non-recourse debt at the project level. As a result, Transurban's corporate debt is structurally subordinated and relies in part on dividend cash flows from those projects for debt service, making its SICR more sensitive to revenue fluctuations on those roads. The major exception, however, is CityLink, which is owned 100% by Transurban and has no project-level debt. CityLink is a mature toll road with proven traffic demand, and contributes more than half of Transurban's proportional EBITDA, providing stability to corporate debt service metrics. In the Fitch base case the leverage trends down over the next several years to debt/EBITDA of 5.0 times, which is appropriate for lower 'A' rated toll road assets. This may be affected by business expansion activities, including acquisitions and greenfield projects, that are currently under consideration.
Fitch also assesses Transurban's concession life cover ratio (CLCR) which is calculated to the maturity of the Citylink concession in 2034 to check that the company could amortise debt with sufficient cushion.
Any problems completing the refinancing of the approximately AUD1.2bn in debt maturing over the next 24 months (such as a major disruption in the financial markets) could negatively affect Transurban's ratings. Ratings are also subject to Transurban's ability to reduce debt/EBITDA in line with Fitch's projections.
A decline in leverage will be necessary as Transurban approaches the end of the concession for Citylink (in 2034), which contributes more than half of the company's proportional EBITDA. An increase in debt/EBITDA above 6.0x for an extended period would put pressure on Transurban's rating. Finally, the rating could be affected if the CLCR falls below Fitch's rating case level of 2.7x.
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