(The following statement was released by the rating agency)
Oct 8 - Fitch Ratings has affirmed European Rail Finance Holdings Limited's (ERFL Holdings) Long-term Issuer Default Rating (IDR) at 'BBB+' with a Stable Outlook and simultaneously withdrawn the rating. At the same time, the agency has assigned Eversholt Investment Limited (EIL) a Long-term IDR of 'BBB+' with a Stable Outlook. Fitch has also affirmed the senior secured rating of the bonds issued by Eversholt Funding Plc (EFP) at 'A-'. The bonds are guaranteed by EIL, ERFL Holdings, and other companies, all owned by EIL, together known as Eversholt Rail Group (ERG).
The withdrawal of ERFL Holdings' IDR and assignment of IDR to EIL reflect the fact that following ERG's ownership change in late 2010, EIL became the ultimate holding company of ERG representing the security and guarantor group. Additionally, ERG prepares audited consolidated accounts for EIL, rather than for ERFL Holdings.
EIL's IDR is primarily supported by its strong business profile. This stems from its position as one of the three major passenger rolling stock companies (ROSCOs) in the UK, benefiting from long-term contract-based cash flow visibility. The higher 'A-' rating of EFP's secured notes recognises the benefits of the security and covenant package of its financing.
EIL benefits from a solid fundamental demand trend, significant barriers to entry, high contract retention and fleet utilisation rates (100% for its passenger rolling stock), sound counterparty-credit quality - albeit with some counterparty concentration - and indirect regulatory support. The company's focus on electric trains is also beneficial due to the ongoing electrification of the UK rail network. Over the past year, the government announced further electrification projects including Transpennine Express, Midland Main Line and extended electrification on the Great Western Main Line.
The key credit constraint for EIL stems from its high leverage (adjusted net debt to EBITDA is expected at up to 6.0x until YE13) together with related interest rate and refinancing risks, as well as the company's high shareholder remuneration policy. The company distributed all excess cash flow for 2011.
However, EIL is expected to de-lever in line with the decreasing net present value (NPV) of the future rental income. The company's loan facility cash sweep mechanism will automatically reduce gross secured debt from December 2013. This is in the absence of refinancing or acquisition of new rolling stock, although this would be pre-leased and therefore increase the NPV. EIL has an interest rate hedging programme in place (at least 80% of debt is to be effectively fixed rate, currently 98% of debt is fixed rate).
Fitch estimates that net adjusted debt to the agency-stressed NPV of expected capital rentals will average close to 85% until YE14. Fitch previously identified this level (for NPV discounted at 9.5% to approximate the company's WACC) as still commensurate with the current ratings. Nevertheless, Fitch considers the leverage headroom as exhausted (although the agency estimates EIL's WACC at around 8.6% following the refinancing, which would give the company some headroom). The agency also notes that EIL comfortably meets a covenant test based on management-expected capital rentals discounted at its average cost of debt.
Adjusted net debt to EBITDA below 6.0x, FFO/adjusted net debt above 10%, and post-maintenance interest cover of above 2.0x are considered comfortable for the IDR level, given EIL's strong business profile. The Stable Outlook reflects Fitch's expectation that the company will remain in line with these guidance levels over the rating horizon.
As of 30 June 2012, liquidity was supported by the cash balance (excluding maintenance reserve and security deposit) of GBP94m, a GBP175m capex facility (of which GBP37m was undrawn), and a GBP25m working capital facility (fully undrawn). 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 to positive rating action include:
- Stronger than commensurate credit metrics on a sustained basis due to a less aggressive dividend policy or an unexpected increase in asset value.
Negative: future developments that may, individually or collectively lead to negative rating action include:
- Weaker than commensurate credit metrics on a sustained basis (commensurate metrics are listed above), possibly due to capex growth without long-term pre-lease agreements in place, or failure to reduce debt with asset value.
- Structural weakening of the business profile due to adverse changes in regulation, government policy or competitive positioning.
(Caryn Trokie, New York Ratings Unit)