OREANDA-NEWS. Fitch Ratings has affirmed Channel Link Enterprises Finance plc's (CLEF) notes, as follows.

GBP300m Class G1 index-linked notes: affirmed at 'BBB', Outlook Stable

GBP150m Class G2 index-linked notes: affirmed at 'BBB', Outlook Stable

GBP300m Class G3 index-linked notes: affirmed at 'BBB', Outlook Stable

EUR73m Class G4 index-linked notes: affirmed at 'BBB', Outlook Stable

EUR147m Class G5 index-linked notes: affirmed at 'BBB', Outlook Stable

EUR147m Class G6 index-linked notes: affirmed at 'BBB', Outlook Stable

GBP400m Class A1 fixed-rate notes: affirmed at 'BBB', Outlook Stable

EUR645m Class A2 fixed-rate notes: affirmed at 'BBB', Outlook Stable

GBP350m Class A3 floating-rate notes: affirmed at 'BBB', Outlook Stable

EUR953m Class A4 floating-rate notes: affirmed at 'BBB', Outlook Stable

CLEF is a ring-fenced structure secured by the core activities of Eurotunnel: shuttle services for trucks/cars/coaches as well as infrastructure operator for railway services (Fixed Link).

The ratings reflect the critical nature of the asset managed by Group Eurotunnel (GET), the volume resilience of passengers on the high-speed trains and car shuttle businesses, the exposure to competition as well as price flexibility on the shuttle service. The ratings are also supported by the long-term maturity of the Eurotunnel concession (2086).

The Stable Outlook is underpinned by CLEF's headroom at the current rating level which we believe should allow the company to weather moderate short-term deterioration in the operating environment following the UK vote to leave the EU.

As GET has performed strongly over 2007-2015, notably in the car shuttle and passenger train business segments, we have reassessed our rating case assumptions. These also incorporate a conservative assumption, amid the uncertainties surrounding the Brexit scenario, of revenues declining at a CAGR of 0.9% between 2015 and 2020. This is mainly the result of a weaker GBP to EUR exchange rate assumption of 1.1. We expect this rate to normalise at 1.2 beyond 2020 and revenues to grow at a CAGR of 1.6% between 2015 and 2050, up from 1.4% at last year review. The resulting average debt service coverage ratio (DSCR) is 1.4x which, in the context of the asset's structural exposure to competition, positions the ratings at 'BBB'.

KEY RATING DRIVERS

Revenue Risk: Volume - Midrange

Traffic volume proved resilient through the economic recession for Eurostar passengers and car shuttle volumes, whereas the truck shuttle market showed severe volatility, partly because of the 2008 tunnel fire accident. In our view, direct competition from ferry operators and exposure to discretionary demand constrain the assessment of volume risk to Midrange.

The shuttle service delivered strong traffic growth in 2015 and 1H16, particularly in the truck shuttle division where volumes were respectively up 3% and 10% yoy for both periods. This was driven by a buoyant market and GET's increasing market share. We expect volume growth to settle down in the next few months.

Recent terrorist attacks in Paris/Brussels weighed on railway network volumes: 2015 volumes were flat while 1H16 volumes were 3% lower yoy. We expect a subdued market until 2019 when volumes should return to a moderate growth path.

Since the completion of the security measures in the French terminal (October 2015), Eurotunnel has not reported any major disruption due to migrants.

Revenue Risk: Price - Midrange

Shuttle service fares are flexible and can be adapted to market conditions. Railway network fares are regulated by the Railway Usage Contract (RUC), preventing a full pass-through of inflation into tariffs. Overall Price Risk assessment is therefore Midrange.

In 2015 and 1H16 GET has been able to leverage against its competitive advantages in the Dover Straits market to increase shuttle service fares well above inflation; on the contrary, the current low inflation in the euro zone and UK is constraining revenue growth in railway network, given regulated price-cap tariffs tracking inflation minus 1.1%. Following the Brexit vote, a spike in UK inflation could dent GET's ability to increase shuttle service's prices in line with blended inflation, particularly in a flat growth environment; on the contrary, this could be beneficial for railway network revenues.

Infrastructure Development and Renewal - Midrange

Strong UK/French regulatory oversight, Eurotunnel's prudent management policy as tunnel operator and the inclusion of minimum capex for Fixed Link in the dividend distribution lock-up covenant calculation mitigates the lack of a formal provisioning for capex under the financing documentation. Risk factor is assessed as Midrange.

The economic life of the asset exceeds CLEF's debt maturity, due to a long 36-year tail to the end of the concession in 2086. The technology used in the project is well-established and management is subject to joint Anglo-French rail regulation. Eurotunnel has an extensive track record in delivering a high level of system reliability, investing in upgrades and safety to enhance its competitive advantages. Capex plans are 100%-funded with projected cash flows and investments are planned in advance taking into account market conditions. This, in our view, provides flexibility in delivering the capex programme.

Debt Structure - Stronger

CLEF is based on a typical issuer-borrower secured structure, bankruptcy-remote vehicle with its own liquidity reserve (DSRA), a robust inter-creditor agreement at borrower's level and with considerable tail. Debt is fully amortising (some back-ended profiles). Interest rates on the notes are largely fixed, with an element of index-linked debt, which is not automatically hedged with revenue increase. Structural features include standard default / distribution tests, with a cash sweep mechanism. Although the lack of mandatory capex provisioning is not standard for transactions of this kind, it is mitigated by a post-capex DSCR test.

Debt Service

As per CLEF's bank covenant compliance certificates, senior DSCR was 1.73x at June 2016 including a margin step-up on the floating-rate notes. This is above 1.67x for the trailing 12 months to June 2015, due to Fixed Link's strong financial performance over the period.

The Fitch rating case, which incorporates conservative traffic and yield assumptions, results in an average/minimum DSCR of 1.4x/1.2x, which is consistent with a 'BBB' category rating. In particular, we assume long-term traffic/yield CAGR of around 0.7%/1% which compares with Fitch Sovereign's assumption on UK GDP growth of 2%.

Sensitivity/break-even analysis on a variety of economic drivers (namely forex, inflation and opex) broadly confirms project resilience. Albeit partially undermined by the project's high operating leverage, traffic break-even analysis shows that the project has low dependence on growth. Our analysis shows the project can break even with traffic growth of 0.2% yoy and a full drawdown of the DSRA and 0.4% yoy without a drawdown.

Peers

CLEF's much wider catchment area gives the company a one-notch higher rating than City Greenwich Lewisham Rail Link plc. However, for Autoroutes Paris-Rhin-Rhone, the higher exposure to competition leads to CLEF being rated one-notch lower. Compared with High Speed Rail Finance (1) PLC, despite sharing Eurostar volumes, CLEF does not benefit from having 60% of its revenues being supported by the UK government via underpinned "availability" payments, which explains the difference in rating.

RATING SENSITIVITIES

Average DSCR below 1.3x under the Fitch rating case may prompt a negative rating action. Conversely, average DSCR consistently above 1.6x under our rating case may prompt an upgrade.

Following the Brexit vote, we will monitor the negotiations on trade and people flows between the UK and EU. Any resulting revenue deterioration beyond our rating case assumption, may result in a negative rating action.

SUMMARY OF CREDIT

CLEF does not include other activities such as Europorte. Fixed Link revenues account for around 75% of 2015 Groupe Eurotunnel's total revenues and 96% of EBITDA.

In the analysis of this transaction, Fitch applied both the Rating Criteria for Infrastructure and Project Finance as well as the Rating Criteria for Toll Roads, Bridges and Tunnels. The Fixed Link is a rail project; nonetheless, the bulk of the revenues come from truck and cars using the shuttle, so the economics of the project are largely similar to a road tunnel.

Furthermore, CLEF is considered stronger than a typical stand-alone road stretch, mainly in light of the critical nature of the infrastructure asset, which enables the Fixed Link business to benefit from a much wider catchment area (substantially the whole of UK and its trade relations with continental Europe) than would normally be for a single-asset project.