(The following statement was released by the rating agency)
Oct 10 - Fitch Ratings has affirmed WSO Finance Pty Limited's (WSO Finance) existing senior secured bank facilities, withdrawn ratings on a loan that has been repaid and assigned new ratings as follows:
AUD505m tranche A loan due September 2014: affirmed at 'BBB+' Outlook Stable
AUD500m tranche B loan due December 2012: paid in full (from 'BBB+' Outlook Stable)
AUD250m tranche C loan due December 2015: affirmed at 'BBB+' Outlook Stable AUD 250m tranche B1 loan due December 2015: assigned 'BBB+' Outlook Stable AUD 255m tranche B2 loan due September 2017: assigned 'BBB+' Outlook Stable
Tranches B1 and B2 replace tranche B which has been repaid in full. Aggregate gross debt increases by just AUD5m reflecting fees and transaction costs.
The affirmation of the 'BBB+' ratings is supported by the importance of the M7 as an integral link in Sydney's orbital road network both for local and regional traffic and by the expected ability of project cashflows to service debt comfortably even in conservative downside scenarios.
The Westlink M7 acts as an important road link for Sydney and also for inter-state traffic. The road serves the expanding suburbs and business areas of western Sydney and links the M5, M2 and M4 motorways. In addition, the Westlink M7 is a major freight corridor that links the major southern and northern national highways in Sydney's west.
After strong traffic growth averaging 7.5% in the 2006 - 2011 period, traffic growth on the Westlink M7 has slowed to 1.3% in FY12 (year ending 30 June). This weaker growth has been caused by a combination of construction works on the adjoining Hills M2 motorway, which are due to be completed in mid-2013 and by weaker domestic economic conditions. Growth should improve in FY14 as the M2 becomes fully operational again but it will be affected by expansion works on the adjoining M5 motorway and by broader economic conditions. Volume risk is assessed as "Midrange".
Toll rates on the Westlink M7 change in line with consumer price inflation, as per the concession agreement and would therefore be constrained should the current weak inflation outlook persist. Price risk is assessed as "Midrange".
The rating is constrained by the relative weakness of WSO Finance's debt structure when compared to project finance norms globally. In particular, WSO Finance is exposed to regular refinancing risk and its covenant package is weakened by the fact that the debt service cover ratio (DSCR), the debt service reserve requirement and the dividend restrictions do not include any principal repayment. In addition, there is no interest rate hedging in place beyond 2018.
Refinancing risk is partially mitigated by the experience of Transurban in the Australian infrastructure banking market as evidenced by the recent successful refinancing of WSO Finance's maturing AUD500m tranche B on 28th September 2012 notwithstanding the reduced appetite of European lenders. Overall, debt structure is assessed as Midrange.
Financial metrics are solid for a 'BBB' category rating. Given the lack of scheduled amortisation and the existence of a finite end date on the concession, Fitch has focussed primarily on the synthetic annuity 20 year DSCR and concession life cover ratio (CLCR). The minimum CLCR in Fitch's base case is 3.18x which, along with a median annuity DSCR of 2.91x indicates a strong ability to retire debt. Finally, the transaction is resilient to interest rate stress scenarios.
WSO Finance's ratings could come under downward pressure in the near term in the event of a major shock to the debt funding markets which meant that the refinancing of tranche A by September 2014 became significantly more challenging.
WSO Finance is the financing vehicle for the Westlink Motorway Group (Westlink) which holds a concession with the Roads and Traffic Authority of New South Wales (RTA) to finance, design, build, operate and maintain the 40km WestLink M7 motorway toll road located in Sydney, Australia. The road opened to traffic in December 2005 and the concession will mature in 2037, after which time the road will be handed back to RTA. Westlink is owned ultimately by Transurban Group (50%), QIC (formerly Queensland Investment Corporation , 25% on behalf of its clients) and Canada Pension Plan Investment Board (25%).