S&P: High Speed Rail Finance PLC Proposed Issuance Assigned Preliminary 'A-' Rating; Outlook Stable
Our preliminary ratings reflect our view of the project's operations phase stand-alone credit profile (SACP), which we assess at 'a-'. The project entered into operations in 2007 and hence there is no construction risk. HSRF is a sister company of High Speed Rail Finance 1 PLC (HSRF1) and High Speed 1 Ltd. (HS1). All senior secured debt issued by these entities ranks pari passu.
HS1 operates the high-speed rail line and associated infrastructure connecting London and the Channel Tunnel under a concession agreement with the U. K. government, which terminates in 2040. Operationally, the project benefits from a transparent and supportive regulatory framework that helps to mitigate operational risk and leads to a strong operational performance in terms of safety and track availability. It has a strong competitive position as the sole high-speed rail connection and the majority of its revenues (about 90%) come from highly stable, inflation-linked regulated track - and station-related charges, paid by the two train operators: the domestic train operator, London & South Eastern Railway Ltd. (LSER; trading as Southeastern); and the international train operator, Eurostar International Ltd. (EIL). Regulated revenues are supplemented by income from unregulated retail, car-parking, and commercial operations. We view the project's market exposure to be very low due to the protection afforded by its contractual structure.
The proposed issuance by HSRF will increase the project's total debt and weaken its credit profile, leading to weaker annual debt service coverage ratios and a more back-ended debt repayment profile. Although the decline in the minimum annual debt service coverage ratio (ADSCR) is limited under our base-case assumptions, the increased debt amount does reduce the average cover ratio. Under our base case analysis, we project the minimum ADSCR to fall to 1.44x from 1.46x and the average ADSCR to fall to 1.65x from 1.79x. In addition, the revised amortization of the debt is relatively back-ended for a project reliant on growth assumptions. The new debt issuance has shortened the concession tail to one year from two years, and includes a bullet repayment of up to ?130 million in December 2039. Consequently, the financial performance of the project, which has an inflation-linked revenue stream, deteriorates under long-term, sustained low inflation rates. We reflect this weakness by assigning a one-notch negative debt structure adjustment to the preliminary operations phase stand-alone credit profile (SACP).
We have placed our existing 'A' ratings on the debt issued by HSRF1 on CreditWatch negative, reflecting the high likelihood that the additional debt will be issued, and the rating on the pari passu debt at HSRF1 will therefore be lowered to the level of the preliminary rating on HSRF. For more details, see "High Speed Rail Finance 1 PLC 'A' Issue Ratings On CreditWatch Negative Following Announced Debt Issuance," published today on RatingsDirect.
The stable outlook reflects our view that the project will continue to deliver strong operational performance and benefit from a supportive and stable regulatory regime. The outlook also factors in the project's strong competitive position as operator of the sole high-speed train route connecting the U. K. to continental Europe, as well as our view that the minimum DSCR of at least 1.4x under our base case is sustainable. The rating is supported by the project's strong contractual structure, including advance train path reservation and payment by train operators and an agreement guaranteed by the U. K. government underpinning domestic train paths. These help to provide performance resilience against stressed operating conditions.
We could lower the ratings if the project's financial profile weakened, for example, as a result of operational underperformance or reduced demand for international train paths, causing the minimum DSCR to fall below 1.4x and a weakened resilience to stress scenarios. A sustained weak inflationary environment could also lead to deterioration in the project's financial performance given HS1's inflation-linked revenue receipts compared to a predominantly fixed-rate debt profile.
We could also lower the ratings if the project becomes exposed to additional counterparty risk as a result of a fall in the ratings on swap counterparties or working capital facility providers to below the project rating level, or if the project incurs additional exchange-rate risk due to the issuance of a further tranche of foreign currency-denominated debt with a lower-rated swap counterparty. The account bank counterparty must be rated at least 'BBB-' to not constrain our 'A-' issue credit rating on the notes.
Following the new debt issuance, a positive rating action is unlikely, in our view, without a further significant improvement in our base-case projection of the minimum average DSCR. In order for us to consider an upgrade, we would need to see a minimum ADSCR of around 1.8x.