(The following statement was released by the rating agency)
Oct 8 - Fitch Ratings has affirmed European Rail FinanceHoldings Limited's (ERFL Holdings) Long-term Issuer Default Rating (IDR) at'BBB+' with a Stable Outlook and simultaneously withdrawn the rating. At thesame time, the agency has assigned Eversholt Investment Limited (EIL) aLong-term IDR of 'BBB+' with a Stable Outlook. Fitch has also affirmed thesenior secured rating of the bonds issued by Eversholt Funding Plc (EFP) at'A-'. The bonds are guaranteed by EIL, ERFL Holdings, and other companies, allowned by EIL, together known as Eversholt Rail Group (ERG).
The withdrawal of ERFL Holdings' IDR and assignment of IDR to EIL reflect thefact that following ERG's ownership change in late 2010, EIL became the ultimateholding company of ERG representing the security and guarantor group.Additionally, ERG prepares audited consolidated accounts for EIL, rather thanfor ERFL Holdings.
EIL's IDR is primarily supported by its strong business profile. This stems fromits position as one of the three major passenger rolling stock companies(ROSCOs) in the UK, benefiting from long-term contract-based cash flowvisibility. The higher 'A-' rating of EFP's secured notes recognises thebenefits of the security and covenant package of its financing.
EIL benefits from a solid fundamental demand trend, significant barriers toentry, high contract retention and fleet utilisation rates (100% for itspassenger rolling stock), sound counterparty-credit quality - albeit with somecounterparty concentration - and indirect regulatory support. The company'sfocus on electric trains is also beneficial due to the ongoing electrificationof the UK rail network. Over the past year, the government announced furtherelectrification projects including Transpennine Express, Midland Main Line andextended electrification on the Great Western Main Line.
The key credit constraint for EIL stems from its high leverage (adjusted netdebt to EBITDA is expected at up to 6.0x until YE13) together with relatedinterest rate and refinancing risks, as well as the company's high shareholderremuneration policy. The company distributed all excess cash flow for 2011.
However, EIL is expected to de-lever in line with the decreasing net presentvalue (NPV) of the future rental income. The company's loan facility cash sweepmechanism will automatically reduce gross secured debt from December 2013. Thisis in the absence of refinancing or acquisition of new rolling stock, althoughthis would be pre-leased and therefore increase the NPV. EIL has an interestrate hedging programme in place (at least 80% of debt is to be effectively fixedrate, currently 98% of debt is fixed rate).
Fitch estimates that net adjusted debt to the agency-stressed NPV of expectedcapital rentals will average close to 85% until YE14. Fitch previouslyidentified this level (for NPV discounted at 9.5% to approximate the company'sWACC) as still commensurate with the current ratings. Nevertheless, Fitchconsiders the leverage headroom as exhausted (although the agency estimatesEIL's WACC at around 8.6% following the refinancing, which would give thecompany some headroom). The agency also notes that EIL comfortably meets acovenant test based on management-expected capital rentals discounted at itsaverage cost of debt.
Adjusted net debt to EBITDA below 6.0x, FFO/adjusted net debt above 10%, andpost-maintenance interest cover of above 2.0x are considered comfortable for theIDR level, given EIL's strong business profile. The Stable Outlook reflectsFitch's expectation that the company will remain in line with these guidancelevels over the rating horizon.
As of 30 June 2012, liquidity was supported by the cash balance (excludingmaintenance reserve and security deposit) of GBP94m, a GBP175m capex facility(of which GBP37m was undrawn), and a GBP25m working capital facility (fullyundrawn). There are no debt maturities (excluding the cash sweep mechanism)until 2016.
WHAT COULD TRIGGER A RATING ACTION
Positive: future developments that may, individually or collectively, lead topositive rating action include:
- Stronger than commensurate credit metrics on a sustained basis due to a lessaggressive dividend policy or an unexpected increase in asset value.
Negative: future developments that may, individually or collectively lead tonegative rating action include:
- Weaker than commensurate credit metrics on a sustained basis (commensuratemetrics are listed above), possibly due to capex growth without long-termpre-lease agreements in place, or failure to reduce debt with asset value.
- Structural weakening of the business profile due to adverse changes inregulation, government policy or competitive positioning.
(Caryn Trokie, New York Ratings Unit)