(The following statement was released by the rating agency)
Aug 30 -
-- We expect Asciano’s ongoing heavy capital-expenditure plans to prevent the company from generating positive free operating cash flow until after fiscal 2014. This is likely to limit any material improvement in credit measures in the next few years that would support a higher rating.
-- Nevertheless, we expect Asciano to remain comfortably positioned at the ‘BBB-’ rating level in the next two years. As a result, we have affirmed the ‘BBB-’ long-term corporate credit and senior unsecured debt ratings on Asciano, but revised the outlook to stable from positive.
On Aug. 30, 2012, Standard & Poor’s Ratings Services said that it had affirmed its ‘BBB-’ long-term corporate credit and senior unsecured debt ratings on the Australian rail-transport and port stevedoring company Asciano Ltd. At the same time, we have revised the outlook on the long-term ‘BBB-’ rating to stable from positive. This rating action resolves the positive outlook on the rating when it was assigned on Feb. 22, 2010.
The rating action reflects our view that Asciano’s continued heavy capital expenditure plans that, while serving to maintain its “strong” business risk profile, will constrain its ability to generate positive free operating cash flow until after fiscal 2014. Consequently, we expect the group’s financial profile to remain at levels commensurate with the ‘BBB-’ rating in the next one-to-two years.
In our opinion, the capital commitments--including supporting the coal-haulage businesses contracted growth profile out to 2014, the A$348 million Port Botany development, and an expanded maintenance program--is likely to see aggregate spending over the next two years of between A$1.5 billion and A$1.7 billion. As such, we expect negative cash flow until 2014, with a resultant modest increase in debt. Moreover, Asciano’s transition to a full-cash tax-paying entity will also limit, in our view, any near-term material improvement in cash-flow metrics. For fiscal 2013 we expect Asciano to improve EBITDA to achieve FFO to debt greater than 16%. In our opinion, given the costs associated with its growth and the Port Botany re-development, a key challenge for the company is to lift EBITDA margins to the high 20% level (from about 26%) to drive improved financial metrics.
The ‘BBB-’ long-term corporate credit rating on Asciano reflects our opinion of the group’s strong market positions in Australia across a range of port stevedoring and rail-transport services, including coal haulage. Also underpinning the rating is the company’s earnings stability, which is supported by long-term take-or-pay contracts in key bulk rail activities, significant revenue diversity, and moderate-to-high barriers to entry. These strengths are tempered by the group’s “significant” financial risk profile, our expectation of increasing competition in port stevedoring, Asciano’s significant capital requirements, and its exposure to operating and volume risks.
We consider Asciano’s liquidity to be “adequate.” In addition to the approximate A$150 million of cash on hand at June 30, 2012, Asciano had undrawn bank facilities of more than A$550 million. The next material debt maturity is not until October 2013, when the A$150 million working capital tranche matures, which forms part of the A$1.45 billion syndicated bank debt facility.
In our view, Asciano has adequate headroom in its unsecured bank debt facilities, which benefit from a comprehensive covenant package, including interest cover and gearing (net debt to EBITDA) covenants. At fiscal 2012, Asciano was comfortably in compliance with these covenants.
Our liquidity assessment of adequate is based on the following factors and assumptions:
-- We expect the company’s liquidity sources (including cash, funds from operations, and credit facility availability) over the next 12 months or so to exceed its uses by more than 1.2x.
-- No material debt maturity in the next 12 months.
-- If EBITDA declines by up to 20%, we expect net sources to be adequate to meet near-term liabilities.
In our analysis, we assumed liquidity in excess of A$1.3 billion over the next 12 months, comprising cash, FFO, and availability under credit facilities. We estimate the company will use substantial amounts of these funds for capital spending, working-capital needs, and shareholder dividends.
The stable outlook reflects our expectation that Asciano’s diverse operations, ongoing operational improvements, and disciplined capital investment will support strong operating cash-flows and underpin ratings quality at the ‘BBB-’ rating level. The ratings and outlook anticipate that Asciano will continue to undertake growth capital expenditure in its rail haulage business, and particularly the coal-haulage business, supported by contracts. We also expect the Port Botany re-development to be successfully executed within the announced cost and time estimates. Given the significant levels of capital expenditure over the next two years, we expect Asciano will maintain its prudent liquidity management and re-finance its debt maturities in a timely manner. While we expect the company’s contract profile to deliver ongoing earnings growth, the capex driven negative free operating cash flow is expected to result in near-term incremental improvements in credit metrics, including adjusted FFO to debt of between 16% and 17% in 2013.
Notwithstanding the revision in the outlook to stable, the rating could be raised in the next few years if we believe Asciano has maintained or strengthened its strong market positions and can sustainably achieve the following:
-- Strengthen, and sustain, fully adjusted FFO to debt to comfortably above 17.5%;
-- Maintain gross EBITDA interest cover comfortably above 3x; and
-- Improve free cash flow generation.
Conversely, the rating could come under pressure if Asciano is exposed to greater-than-expected competition in any of its key businesses that materially eroded revenue, margins, or market shares, and resulted in a deterioration of financial metrics, including FFO-to-debt of sustainably below 14%. Related Research
-- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008
-- Criteria Methodology: Business Risk/Financial Risk Matrix Expanded, May 27, 2009
Senior unsecured BBB-
Asciano Finance Ltd.
Senior unsecured BBB-
Asciano Finance Trust
Senior secured BBB-
Ratings Affirmed; CreditWatch/Outlook Action
Corporate credit rating BBB-/Stable/-- BBB-/Positive/--