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May 16 (The following statement was released by the rating agency)
Fitch Ratings has affirmed Interlink Roads Pty Ltd's (Interlink) senior secured bank debt facilities at 'A-'. The Outlook is Stable.
The facilities comprise:
AUD432m tranche A due December 2015
AUD288m tranche B due December 2016
AUD13m standby facility due December 2015
Interlink operates the mature M5 Motorway in Sydney, Australia under a concession agreement with the Roads and Maritime Services agency of the New South Wales government. In 2012 the concession term was extended by 3.3 years to 2026 as part of an agreement with the government to widen the road.
KEY RATING DRIVERS
The 'A-' rating is supported by the M5's continued importance in Sydney's orbital road network. The motorway provides a key linkage to the Sydney sea port and airport for the expanding warehousing and distribution infrastructure to the west of the city. Traffic and revenue have performed strongly since tolling commenced in August 1992 such that this mature road has reached capacity at peak times.
For the nine months to 31 March 2014, toll revenue decreased 1.8% yoy, driven by a 1.7% drop in average daily trips during the period. The traffic decrease was due to disruption from the current road-widening project, although the decline was not as much as Fitch estimated at the time of the last review in May 2013. Usage of the road is expected to increase substantially once the widening project is complete, as was experienced by the M2 toll road in Sydney following its expansion in 2013. Therefore, Fitch has assigned a 'stronger' attribute for volume risk (equivalent to low volume risk). In addition, price risk is deemed to be 'mid-range' due to provisions in the concession that permit toll increases that track inflation albeit in 50-cent increments.
The widening project began in July 2012 under a fixed-price and fixed-time contract with Abigroup Contractors Pty Limited. The project is currently more than 70% complete and a portion of the new lanes has opened. Overall, the construction is within budget and on schedule for final completion in December 2014. Fitch notes the strong experience of Abigroup and of its parent company and guarantor, Land Lease Corporation Limited, as well as the contractual terms protecting Interlink in the case of cost or time overruns. Fitch's assessment of completion risk is 'mid-range'.
Interlink puts together an annual major maintenance plan in conjunction with its 50% shareholder, Transurban. Interlink has over 20 years of experience in operating and maintaining the M5. The road maintenance is straightforward, with resurfacing required once every 14 years. Completion of the current widening project should ensure that the M5 is in good condition overall. Interlink benefits from Transurban's contractor relationships and purchasing economies of scale. Infrastructure Development and Renewal Risk is assessed as 'stronger'. Once the expansion is completed, the expected traffic ramp-up in combination with the 3.3 year concession extension should provide ample capacity to repay debt. Based on Interlink's planned amortisation schedule during 2017-2024, Fitch's rating case has a projected minimum concession life cover ratio (CLCR) of 2.04x, including a two-year debt free tail before concession maturity. This level is consistent with an 'A' category rating.
Interlink is exposed to refinancing risk on bullet maturities, which are short-dated for infrastructure assets. In Fitch's global portfolio, these are unusual features for 'A' category rated road concessions but typical of Australian road projects. In addition, Interlink and its main sponsors, including Transurban Group (Transurban Finance Company Pty Limited rated 'A-'/Stable) and major Australian infrastructure investment funds, have a track record of refinancing maturing facilities with adequate buffer before the due dates, supported by the sponsors' strong bank relationships. Finally, cashflow sensitivity analysis shows that Interlink could absorb significantly increased debt pricing if necessary. Overall, Fitch has assessed Interlink's debt structure as 'mid-range'.
Interlink's ratings would come under downward pressure in the event of a material delay or cost overrun in completion of the widening project (to the extent that these are not covered by the contractor), a delay in commencement of amortisation beyond 2017, or problems in refinancing debt issues when they mature. Prolonged weakening in traffic or operational difficulties that result in the CLCR dropping below 1.9x could result in a rating downgrade.