(The following statement was released by the rating agency) Fitch Ratings-Sydney/London-June 21: Fitch Ratings has affirmed the 'A-' ratings on the senior secured debt issued by AMT Management Limited, the financing vehicle for the Eastern Distributor (ED) toll road in Sydney, Australia. The Outlook is Stable. The rated debt securities comprise the following: - AUD300 million medium-term notes due December 2020 - AUD226.3 million term loan due May 2022 KEY RATING DRIVERS The rating reflects the importance of the ED motorway as a critical transportation link through central Sydney, AMT's ability to increase tolls in excess of inflation when inflation is low, and the moderate projected leverage in the context of its long concession that extends to 2048. Traffic growth has generally been low but steady over the past five years, while tolls have increased at the maximum allowed under the concession agreement, generating strong revenue growth. The forecasted average debt service coverage ratio (DSCR) during the planned amortisation period positions AMT within the 'A' rating category under Fitch's sector criteria. AMT's largely bullet debt structure entails refinancing risk; however, we note that AMT and its main sponsor Transurban Group (Transurban Finance Company Pty Limited's debt rated 'A-' with Stable Outlook) have a good track record of refinancing maturing facilities with adequate cushion before the due dates, which is supported by Transurban's strong bank relationships. Proven Traffic Base: Revenue Risk (Volume) - Midrange The ED provides a vital 6-kilometre transportation link through the centre of Sydney, linking the Sydney Harbour Bridge, Sydney Harbour Tunnel, and central business district with Sydney Airport and the M5 East motorway to the south. Traffic has generally grown steadily since the road opened, increasing to around 59,000 trips a day in the quarter ended March 2018 from an average of around 25,000 in 2000. The ED has one of the highest toll rates in the Sydney region at more than AUD1 per kilometre for cars, with the resultant demand elasticity contributing to slower average traffic growth in the five years to June 2017 of around 2% a year. However the only traffic downturn on a fiscal year basis (fiscal year ends 30 June) was a drop of 0.3% in 2009. High Toll Growth: Revenue Risk (Price) - Midrange AMT's agreement with the New South Wales government provides the ability to raise the tolls on a quarterly basis at a rate equal to the greater of 1% or an inflation index weighted to 32.5% CPI and 67.5% average weekly earnings. This has allowed AMT to increase tolls at a rate greater than inflation in most periods, with a CAGR of about 4.5% since the road opened. Strong Maintenance Program: Infrastructure Development and Renewal - Stronger The ED's major maintenance programme is straightforward, non-complex work carried out by highly experienced parties and follows a rigorous planning process. AMT derives substantial benefit from leveraging Transurban's contractor relationships and purchasing economies of scale. AMT is required to maintain a letter of credit for the benefit of the lenders for the next 12 months of major maintenance expenditure, but does not expect it to be drawn upon. Management does not expect to develop ED above its current capacity of 77,000 vehicles a day, and plans to continue to maximise revenue from the existing traffic to meet debt service. Well-Managed Refinancing Risk: Debt Structure - Midrange While typical of the Australian market, the largely bullet debt structure is a weakness compared with other toll roads globally that Fitch monitors. However AMT and Transurban have proven track records of refinancing debt well in advance of maturity. AMT benefits from Transurban's global banking relationships and capital markets experience. There is no interest-rate risk on the current debt tranches, as they are fully hedged (or fixed-rate) to maturity. Structural features include interest-rate hedging requirements, interest coverage cash lock-up and default covenants, and a one year maintenance letter of credit. Financial Profile Given the substantial use of bullet debt maturities and the existence of a finite end date on the concession, Fitch's metrics analysis focuses on leverage as it is management's current plan is to fully amortise senior debt during FY19-FY31, in line with the concession agreement. Fitch also considers the debt service coverage ratio during that period. In Fitch's rating case net debt/EBITDA is estimated at 4.9x in FY18, and should drop to 3.0x in FY22 due to debt repayment as well as increasing profitability. The DSCR is expected to average 2.2x during the planned debt amortisation period. The projected deleveraging and average DSCR indicate a strong ability to amortise debt by 2031 as required. Fitch's analysis has demonstrated that the metrics are resilient to both interest-rate stress and traffic downside scenarios.
PEER GROUP AMT's closest peer is Sydney-based WSO Finance Pty Limited (senior debt rated A-/Stable), the financial vehicle for the Westlink M7 motorway. The two roads have similar concession terms and leverage levels. The ED has the ability to raise tolls at a faster rate than Westlink M7 when inflation is less than 1% per calendar quarter, and has a higher minimum concession life coverage ratio. The ED is a more mature road with a longer operating and traffic history, although its recent traffic and revenue growth is lower compared with Westlink M7. Fitch has also compared AMT with two European toll-road issuers - Autoroutes Paris-Rhin-Rhone (APRR; A-/Stable) and SIAS S.p.A. (BBB+/Stable). Both issuers' road networks are much larger than the ED and had more volatile traffic flows in the past 10 years, although the ED's resilience in a downturn has not been tested due to Australia's long run of economic growth. AMT has lower leverage than APRR and a substantially higher concession life coverage ratio than both European issuers, as well as a longer remaining concession term. RATING SENSITIVITIES Previously, the leverage metrics used in the rating sensitivities were based on the debt balances prior to the commencement of amortisation, as all outstanding debt issues had 100% bullet repayments at maturity. For reference, net debt/EBITDA averaged 6.3x over the past five years, dropping from 7.1x in 2013 to 5.2x in FY17. Now that debt amortisation is required to commence under the new debt facility, and to continue at a rate that will result in full repayment of senior debt as required under the Concession Agreement by 2031, the sensitivity metrics incorporate the expected reduction in leverage. Future developments that may, individually or collectively, lead to negative rating action include: - A higher-than-expected leverage profile with the ratio of net debt/EBITDA projected to be above 3.5x by 2022 in Fitch's rating case; - Inability to prefund bullet debt well in advance of maturities. Future developments that may, individually or collectively, lead to positive rating action include: - A faster-than-expected deleveraging profile with net debt/EBITDA projected to fall below 2.5x by 2022 in Fitch's rating case, with full amortisation projected by 2031. CREDIT UPDATE Performance Update Average annual daily traffic increased by 1.6% in FY17. The growth was slower than the 4.2% in FY16, but in line with Fitch's prior rating case assumption of 1.5% growth. Traffic in FY17 supported growth in toll revenue of 6.1% and EBITDA of 6.9%. Traffic growth has accelerated to 4.8% in the nine months to March 2017, largely due to the closure by the Roads and Maritime Services (RMS) of the Cleveland Street off-ramp from the ED. The off-ramp had previously allowed motorists to exit the ED quite close to the CBD, but paying the toll. It was closed because it was causing exiting traffic to back up onto the ED due to a traffic light at the end of the ramp. The off-ramp was initially closed in July 2017 on a trial basis, but the RMS has now made the closure permanent. In May 2018 AMT completed the issuance of a AUD226.3 million bank debt facility, with the proceeds being used to repay the debt maturity in July 2018 and pay associated costs. The new debt is a partially amortising facility with a final repayment of AUD155.7 million due in May 2022. The debt has been issued at a rate of 85bp over the bank bill swap rate, swapped to an all-in fixed rate of 3.12%, which substantially reduced AMT's cost of borrowing compared with the repaid debt.
Fitch Cases The Fitch Base Case assumes annual traffic growth during FY19 to FY28 averages 1.1%, and then gradually drops to zero by 2045. Projected refinancing margins are 200bp, with base rates gradually increasing to 5% by 2026 from their current level of around 1.8%. The Fitch Base Case results in a net debt/EBITDA dropping from 4.8x in FY18 to 2.9x in FY22. The DSCR averages 2.3x over the planned debt amortisation period of FY19 to FY31. The Fitch Rating Case makes the following adjustments to the Base Case assumptions: - Decrease in traffic growth, such that the annual growth during FY19 to FY28 averages 0.5%, and then gradually drops to zero by 2034 and continuing at that level until the end of the concession in 2048. - Increase in refinancing margins by an additional 50bp - 5% increase in operating and maintenance (O&M) and major maintenance costs in each year Asset Description AMT is the borrowing entity for the Airport Motorway Group, which holds the 48-year concession to operate Sydney's 6-kilometre ED motorway. The ED links Sydney's central business district, the Sydney Harbour Tunnel and Sydney Harbour Bridge with the city's southern suburbs and Sydney Airport. The main plaza opened in December 1999 and traffic is well-established over its 18-year operating history.
Contact: Primary Analyst David Cook Director +61 2 8256 0363 Fitch Australia Pty Ltd Level 15, 77 King Street, Sydney NSW 2000 Secondary Analyst James Hodges Associate Director +44 20 3530 1278 Committee Chairperson Ian Dixon +44 20 3530 1815 Media Relations: Leslie Tan, Singapore, Tel: +65 67 96 7234, Email: leslie.tan@fitchratings.com. Additional information is available on www.fitchratings.com Applicable Criteria Rating Criteria for Infrastructure and Project Finance (pub. 24 Aug 2017) https://www.fitchratings.com/site/re/902689 Toll Roads, Bridges and Tunnels Rating Criteria (pub. 22 Feb 2018) https://www.fitchratings.com/site/re/10021263 Additional Disclosures Dodd-Frank Rating Information Disclosure Form https://www.fitchratings.com/site/dodd-frank-disclosure/10035504 Solicitation Status https://www.fitchratings.com/site/pr/10035504#solicitation Endorsement Policy https://www.fitchratings.com/regulatory ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. 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