Nov 22 - Fitch Ratings has affirmed City Greenwich Lewisham Rail Link plc’s (CGLR) GBP165m senior secured bonds due 2020 at ‘BB+’ and revised the Outlook to Positive from Stable.
The Positive Outlook reflects the expected continued improvement in CGLR’s cash flows and cover ratios driven by modest patronage growth, above-trend Retail Price Index (RPI) inflation and a debt service profile that will decline over the medium term.
The affirmation reflects the fact that CGRL has performed in line with Fitch’s expectations over the past year. The key rating factors are i) volume-linked patronage; ii) relatively weak debt structural features; and iii) a debt service cover ratios that Fitch expects to increase over time.
The primary drivers for the patronage remain employment and development projects in and around Canary Wharf and City of London. Other factors influencing the growth in patronage numbers include the development of the Stratford Regional Centre (including the Olympic park and the Stratford International high speed rail station) and tourism directed towards the Cutty Sark and the Greenwich area. After a decline in 2008 - due to disruptions caused by the three-car project and job losses in the City of London and Canary Wharf - patronage has been growing healthily (up year-on-year by 3.2% in 2009, 4.9% in 2010 and 5.2% in 2011) and the agency expects the growth to continue, although at much more modest rates (to reflect the present employment outlook, particularly in financial services). The indexation mechanism used to calculate the usage fee received from the Docklands Light Railway (DLR) ensures that the project’s revenue is effectively linked to RPI. As such, high RPI-inflation over the past few years also helped to lift project’s cash flows.
Fitch notes that some of the transaction’s structural features are relatively weak, including a six-month interest-only debt service reserve account and the lack of a maintenance reserve account. The cash lock-up ratio - set at a minimum debt service cover ratio (DSCR) (excluding cash balances) of 1.2x -was satisfied in June 2012 and Fitch expects the project to release a substantial sum of trapped cash. This may prove detrimental to the transaction if, in the medium term, patronage is challenged by a difficult economic environment or volume forecasts prove to be less robust than expected.
The DSCR (ex-cash) as at the end of June 2012 stood at 1.26x, in line with Fitch’s forecast. The revised Fitch rating case assumes more conservative patronage growth, resulting in average DSCR of 1.74x and a minimum DSCR of 1.19x for December 2012. The project’s ability to service debt also benefits from a modest reduction in scheduled debt service after 2014, with a more material decline after 2016.
Fitch does not consider the heavy maintenance costs to be a main risk factor for the project at the moment. CGRL’s operational obligations are deemed reasonably straightforward and therefore relatively predictable. Fitch has analysed certain cost exposures through sensitivity analysis.
Fitch ran several sensitivities, including a break-even analysis in reduction in patronage, 40% increase in heavy maintenance costs as well as sensitivities assuming low inflation or stressed patronage levels. The agency considers all results to be robust and consistent with the project’s current ratings.
Whilst actual and minimum DSCR in excess of 1.30x and average forecast DSCR above 1.70x would be positive for the ratings, patronage below current assumptions, a prolonged period of low or negative inflation, or an increase in operating and heavy maintenance costs could put the ratings under pressure.
CGLR holds a 24-and-half-year concession until March 2021, under a government private finance initiative, to build and maintain a portion of the DLR network (Lewisham Extension), serving the Greenwich and Canary Wharf areas.