Jan 25 - Fitch Ratings has assigned High Speed Rail Finance (1) PLC’s (the issuer) senior secured notes expected ratings, as follows:
GBP5bn Multicurrency Note Issuance Programme: ‘A-(EXP)', Outlook Stable
GBP305m fixed rate bonds, expected to mature 2039: ‘A-(EXP)'; Outlook Stable
GBP150m index-linked bonds, expected to mature 2039: ‘A-(EXP)'; Outlook Stable
The expected ratings reflect the resilient operating profile of HS1 Limited (HS1, or the borrower), operator of the only high speed railway concession in the UK (High Speed 1), expiring December 2040. The concession has been specifically designed by the UK government to achieve a financially robust framework, combining availability-style domestic revenues (53% of revenues benefit from direct UK government support from 2014 until maturity, with a commitment to keep domestic volumes stable until this support begins) with low volatility volume-based international revenues (based on the highly stable and dominant Eurostar International Limited train services from London to Paris and Brussels). This results in a Stronger assessment for volume risk.
Price risk is limited as the concession framework also allows the sponsors to recover their invested capital (including debt) through the RPI-linked investment recovery charge (IRC), equivalent to 52% of revenue and 91% of EBITDA. Unlike other regulated assets, the IRC is fixed and is therefore not subject to periodic regulatory review. This results in a Stronger assessment for price risk.
HS1 also benefits from the ability under the concession to pass substantially all operating, maintenance and long term renewal costs to infrastructure users or subcontractors (principally the operational contractor, a guaranteed subsidiary of Network Rail Infrastructure Limited (rated ‘AAA’/Negative)). This leads to a Stronger assessment for infrastructure development and renewal risk.
The expected ratings also reflect the structural protection provided for secured creditors, including a comprehensive security package, coverage-linked lock-up trigger and default covenants, limited refinancing risk within an overall amortising debt profile (with adequate 21 month tail to concession maturity) and dedicated liquidity equivalent to 12 months’ debt service. However, creditors are exposed to the counterparty risk of hedge providers. Furthermore, creditors are exposed to risks related to HS1’s decision to retain certain existing swaps and amortise them over time (via additional ‘off-setting’ swaps) rather than terminate them at financial close. Consequently, the debt structure is considered to be Midrange.
HS1’s minimum and five-year average debt service coverage ratios (DSCR) of 1.47x and 1.50x, respectively, compare favourably with ‘BBB’-category rail projects such as Channel Link Enterprises Finance plc (‘BBB’/Stable) and ‘BBB’-category availability-based UK private finance initiative (PFI) projects such as Derby Healthcare Plc (‘BBB’/Stable). Debt service is considered to be Midrange.
Overall, Fitch believes that HS1 is a highly resilient credit based on the five key risk attributes discussed above. These features are better than those seen in most traditional transport infrastructure projects and place HS1 into the ‘A’ category.
A pre-requisite for a positive rating action would be continued stable operating performance, particularly in relation to non-underpinned and commercial revenues and unrecoverable costs. As the project is considered a quasi-availability project, significant and sustained outperformance of Fitch’s rating case (the base case adjusted for some downside risk) resulting in minimum and five year average debt service coverage ratios (DSCR) well in excess of 1.50x and 1.60x, respectively may justify an upgrade.
Revenue generation that leads to material underperformance of the rating case, resulting in minimum and average DSCRs at or below 1.30x and 1.40x, respectively could trigger negative rating action.
A presale report for High Speed Rail Finance (1) PLC will shortly be available at www.fitchratings.com.
Link to Fitch Ratings’ Report: High Speed Rail Finance (1) PLC