Fitch Affirms Eversholt Investment at 'BBB+'; Outlook Stable
OREANDA-NEWS. Fitch Ratings has affirmed UK-based Eversholt Investment Limited's (EIL) Long-term Issuer Default Rating (IDR) at '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 EIL's subsidiary companies, together known as Eversholt Rail Group (ERG).
The IDR is primarily supported by EIL's strong business profile stemming from its position as one of the three major passenger rolling stock companies (ROSCOs) in the UK, which provides long-term contract-based cash flow visibility. The higher 'A-' rating of EFP's secured notes reflects the benefits of the security and covenant package of its financing.
KEY RATING DRIVERS
Change in Owner Rating Neutral
ERG was acquired by Cheung Kong Infrastructure Holdings Limited and Cheung Kong (Holdings) Limited (collectively CKI) in early 2015 for an enterprise value of about GBP2.5bn. The change in shareholder was at Eversholt Investment Group (Luxembourg) Sarl, which was previously owned by 3i, Morgan Stanley Infrastructure Partners and STAR Capital Partners.
There has been no impact on EIL's existing capital structure following the change in ownership. Fitch expects the new shareholder to be supportive of EIL's business profile and its credit profile and has not assumed a change in the company's dividend policy due to this transaction.
Credit Metrics Expected within Guidelines
We expect funds from operations (FFO)- adjusted net leverage to remain around the 2014 level of 5.4x over 2015-2018, despite our assumption of continued shareholder returns. FFO fixed charge cover is forecast to remain at 2.5x-3.5x. We expect net debt/NPV (net present value of passenger capital rentals) to remain within negative rating guidance of 85% over the 2015-2018 period, based on our assumption of weighted average cost of capital (WACC) of 9.5%.
EIL's recently announced debt-funded procurement of 173 dual-mode vehicles for GBP361m is not expected to significantly impact the credit metrics. In the event of further material acquisitions of new rolling stock, Fitch expects EIL will moderate dividend payments and reduce repayments of the subordinated shareholder loan to preserve its credit metrics.
Strong Business Profile
EIL benefits from solid fundamental demand trends, 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. Continued strong passenger and freight demand in the UK is expected to support over 50% growth in passenger rolling stock over the next 30 years.
Low Risk to Renewals
The risk of non-renewal or inability to transfer fleet to be operated by other franchises in the short- to medium-term is considered low given current capacity constraints and the company's strong track record of 100% utilisation of its fairly young passenger rolling stock. The risk of non-renewal is low also due to EIL's high proportion of electrified stock and our expectation that the proportion of electric vehicles in the UK will rise to 80% in 2019 and potentially to as much as 90% by 2043, from 68% currently. However, Fitch's rolling stock rental forecasts include more conservative assumptions in respect of the phasing-out of fleet, exposure to increased electrification and re-leasing post franchise renewal.
Refranchising Programme Impact
EIL has been able to negotiate increased rentals under some of the existing leases in the recently contracted franchises, to reflect market-based pricing and increased capex requirements. The franchises that have been re-contracted or extended in 2015 include ScotRail, Crossrail, Great Western and East Midlands while Northern, TransPennine and East Anglia franchises are being re-tendered . EIL is in discussions, where relevant, with the bidders, the DfT and Transport for London, with regard to all of the new franchises.
Notes' Security and Covenant Package
The higher 'A-' rating of EFP's secured notes recognises the benefits of the security and covenant package of its financing. Forward-looking covenants with lock-up levels act as an early warning signal, but may not precede a negative rating action. The bonds' amortisation feature is also viewed as positive in that the gradual debt repayment schedule mirrors a depreciating asset base.
Fitch's key assumptions within the rating case for EIL include:
-Current operating leases to run until franchise expiry.
-Renewal assumed at stressed levels and is dependent on the remaining life of the vehicles, risk of electrification and any other risk of obsolescence.
-No new builds unless already contracted.
-Cost forecasts in line with historical trends.
-Dividend forecasts broadly in line with management expectations and historical trends.
Positive: Future developments that could lead to positive rating actions include:
- Adjusted net debt/NPV below 75%
- FFO-adjusted net debt sustainably below 5.5x
- FFO fixed charge cover greater than 3.5x
Negative: Future developments that could lead to negative rating action include:
- Adjusted net debt/NPV in excess of 85%
- FFO-adjusted net leverage greater than 6.5x
- FFO fixed charge cover of less than 2.5x
- Consistently negative free cash flows after capex and dividends especially in the context of increased equity returns rather than contracted business growth
As of 30 June 2015, the company had unrestricted cash & cash equivalents of GBP49.4m (excluding restricted cash of GBP26.5m). The GBP500m revolving credit facility due in 2019 is currently undrawn and fully available. Debt maturities are considered well-spread with any future drawings on credit facilities due in 2019 and bonds maturing post 2020.