Fitch Revises High Speed Rail Finance (1) PLC's Outlook to Positive; Affirms at 'A-'
GBP5bn Multicurrency Note Issuance Programme: affirmed at 'A-', Outlook revised to Positive from Stable
GBP610m fixed rate bonds, maturing November 2038: affirmed at 'A-', Outlook revised to Positive from Stable
GBP257m index-linked bonds, maturing November 2038: affirmed at 'A-', Outlook revised to Positive from Stable
The Outlook revision reflects HS-1 Limited's (HS-1 or the borrower) outperformance of Fitch's base and rating case with 2014/15 backward and forward looking annual debt service coverage ratios (DSCR) at 1.96x and 2.06x, respectively. HS-1 completed its first regulatory pricing review in 2014 and refinanced some bank debt in April 2015, removing residual refinancing risk.
The ratings reflect HS-1's resilient operating profile and stable, predictable revenues together with strong and relatively stable DSCR and loan life coverage ratio metrics. HS-1 is the only high speed railway concession in the UK, with services running between London St. Pancras and the Channel Tunnel.
KEY RATING DRIVERS
Revenue Risk: Stronger
HS-1's concession framework combines availability-style domestic revenues (approximately 65% of revenues benefit from being underpinned by the UK government from 2014 until maturity) with low volatility volume-based international revenues, predominantly based on the highly stable and dominant Eurostar International Limited train services from London to Paris and Brussels.
Price risk is low as the concession framework also allows the sponsors to recover their invested capital (including debt) through the RPI-linked investment recovery charge (IRC), and an operations and maintenance recovery charge (OMRC). HS1 Limited's first periodic regulatory review of OMRC charges was completed in May 2014, with no objections from the regulator.
Operation Risk: Stronger
The majority of operations and maintenance (O&M) has been outsourced to a subsidiary of Network Rail (AA+/Stable), the leading rail infrastructure operator in the UK, which guarantees the subsidiary's obligations. This provides not only an experienced operator, but also substantial pass-through of liabilities. While the concession and operating agreements are not strictly 100% back-to-back, this risk has been reduced through a renegotiation of the operating agreement, although Fitch notes that there is a limited universe of replacement operators.
Infrastructure Development & Renewal Risk: Stronger
Major maintenance is largely the operator's responsibility, with HS-1's responsibility limited and predictable. Forward-looking escrow arrangements in respect of track and station capex provide high visibility of O&M and renewal costs.
Debt Structure: Midrange
Rated debt is senior, secured and fully amortising, with limited exposure to interest rate risk. Dedicated 12-month liquidity facilities at both issuer and borrower levels also support debt service. The DSCR profile is relatively stable.
FY15 historical and projected annual DSCR was 1.96x and 2.06x, respectively. HS-1's IRC, representing 83% of EBITDA was up 5.2% yoy, driven by additional domestic and international train paths, contractual RPI increases and the Brussels discount agreement dropping to 40% from 60% in December 2014. Net OMRC (8% of EBITDA) was up GBP6.2m yoy - primarily driven by additional train paths and lower HS-1 costs. Finally, net unregulated revenue (9.5% of EBITDA) was driven by additional space at St. Pancras station and improved lease terms on the expiry of existing leases. Total train paths were up by 0.8% yoy (domestic by 0.6% and international by 1.6%).
Fitch's rating case has been updated to reflect the completion of HS-1's first five year regulatory pricing review, updated debt characteristics after the 2015 refinancing and updated expectations for the new 2015-2020 control period for revenue and pricing. Fitch's average DSCR and LLCR for 2016-2038 are 1.75x and 1.62x, respectively. Continued strong operating performance including average rating case DSCR and particularly LLCR sustainably in excess of 1.6x could result in an upgrade.
Conversely revenue deterioration that leads to material underperformance of the rating case, resulting in an average DSCR/LLCR below 1.50x could trigger negative rating action.
SUMMARY OF CREDIT
HS1 is the operator of the only high speed railway operating in the UK (High Speed 1). The rail line connects London St Pancras International station to high speed commuter services throughout Kent, and international passenger destinations in Europe (i.e. Paris and Brussels) via the Channel Tunnel.