Fitch Affirms Sydney's Eastern Distributor at 'A-'; Outlook Stable

(The following statement was released by the rating agency) Fitch Ratings-Sydney-June 17: 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 its long concession that extends to 2048. Traffic growth has been steady over the past five years and was supported by the permanent closure of the Cleveland Street off-ramp in the fiscal year ended June 2018 (FY18). Meanwhile, tolls have increased at the maximum allowed under the concession agreement, generating strong revenue growth. The forecast 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, AMT and its main sponsor Transurban Group (Transurban Finance Company Pty Limited's debt rated A-/Stable) 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, exceeding 59,000 trips a day in the quarter ended March 2019 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. However the only traffic downturn on a fiscal year basis was a drop of 0.3% in FY09. 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 Programme: 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 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 to fully amortise senior debt during FY20-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 4.5x in FY19, and should drop to 2.9x in FY22 due to debt repayment as well as increasing profitability. The DSCR is expected to average 2.1x 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 than that of Westlink M7. Fitch has also compared AMT with European toll-road issuers APRR (A-/Stable), SIAS S.p.A. (BBB+/Negative) and Brisa Concessao Rodoviaria, S.A. (A-/Stable). These 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 Brisa, and a substantially higher concession life coverage ratio than all three issuers, as well as a longer remaining concession term. RATING SENSITIVITIES Future Developments That May, Individually or Collectively, Lead to Negative Rating Action: - A higher-than-expected leverage profile with the ratio of net debt to 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: - 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 4.5% in FY18. The growth was higher than the 1.4% in FY17, and above Fitch's prior rating case assumption of 3.0% growth. The above-average growth resulted from 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, before paying the toll. It was closed because a traffic light at the end of the ramp caused exiting traffic to back up onto the ED. The off-ramp was initially closed in July 2017 on a trial basis, but the RMS has now made the closure permanent. Traffic in FY18 supported growth in revenue of 8.1% and EBITDA of 7.8%. Fitch Cases The Fitch base case assumes annual traffic growth will average 1.2% over FY19 to FY29 (excluding negative growth associated with the opening of stage 3A and 3B of the WestConnex project), and then gradually drop to zero from 2039 onwards. Projected refinancing margins are 200bp, with base rates gradually increasing to 4.5% by 2028 from their current level of around 2.0%. The Fitch base case results in net debt/EBITDA dropping from 4.4x in FY19 to 2.8x in FY22. The DSCR averages 2.2x 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 0.6%, and then gradually drops to zero by 2039 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 19-year operating history. Contact: Primary Analyst James Hodges Associate Director +61 2 8256 0377 Fitch Australia Pty Ltd Level 15, 77 King Street, Sydney NSW 2000 Secondary Analyst David Cook Director +61 2 8256 0363 Committee Chairperson Sajal Kishore Senior Director +65 6796 7095 Media Relations: Peter Hoflich, Singapore, Tel: +65 6796 7229, Email: peter.hoflich@thefitchgroup.com; Leslie Tan, Singapore, Tel: +65 6796 7234, Email: leslie.tan@thefitchgroup.com. Additional information is available on www.fitchratings.com Applicable Criteria Rating Criteria for Infrastructure and Project Finance (pub. 27 Jul 2018) https://www.fitchratings.com/site/re/10038532 Toll Roads, Bridges and Tunnels Rating Criteria (pub. 30 Jul 2018) https://www.fitchratings.com/site/re/10038900 Additional Disclosures Dodd-Frank Rating Information Disclosure Form https://www.fitchratings.com/site/dodd-frank-disclosure/10079230 Solicitation Status https://www.fitchratings.com/site/pr/10079230#solicitation Endorsement Policy https://www.fitchratings.com/regulatory ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTPS://WWW.FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE CODE OF CONDUCT SECTION OF THIS SITE. DIRECTORS AND SHAREHOLDERS RELEVANT INTERESTS ARE AVAILABLE AT HTTPS://WWW.FITCHRATINGS.COM/SITE/REGULATORY. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE. Copyright © 2019 by Fitch Ratings, Inc., Fitch Ratings Ltd. and its subsidiaries. 33 Whitehall Street, NY, NY 10004. Telephone: 1-800-753-4824, (212) 908-0500. Fax: (212) 480-4435. Reproduction or retransmission in whole or in part is prohibited except by permission. All rights reserved. In issuing and maintaining its ratings and in making other reports (including forecast information), Fitch relies on factual information it receives from issuers and underwriters and from other sources Fitch believes to be credible. Fitch conducts a reasonable investigation of the factual information relied upon by it in accordance with its ratings methodology, and obtains reasonable verification of that information from independent sources, to the extent such sources are available for a given security or in a given jurisdiction. The manner of Fitch's factual investigation and the scope of the third-party verification it obtains will vary depending on the nature of the rated security and its issuer, the requirements and practices in the jurisdiction in which the rated security is offered and sold and/or the issuer is located, the availability and nature of relevant public information, access to the management of the issuer and its advisers, the availability of pre-existing third-party verifications such as audit reports, agreed-upon procedures letters, appraisals, actuarial reports, engineering reports, legal opinions and other reports provided by third parties, the availability of independent and competent third- party verification sources with respect to the particular security or in the particular jurisdiction of the issuer, and a variety of other factors. Users of Fitch's ratings and reports should understand that neither an enhanced factual investigation nor any third-party verification can ensure that all of the information Fitch relies on in connection with a rating or a report will be accurate and complete. Ultimately, the issuer and its advisers are responsible for the accuracy of the information they provide to Fitch and to the market in offering documents and other reports. In issuing its ratings and its reports, Fitch must rely on the work of experts, including independent auditors with respect to financial statements and attorneys with respect to legal and tax matters. Further, ratings and forecasts of financial and other information are inherently forward-looking and embody assumptions and predictions about future events that by their nature cannot be verified as facts. As a result, despite any verification of current facts, ratings and forecasts can be affected by future events or conditions that were not anticipated at the time a rating or forecast was issued or affirmed. The information in this report is provided "as is" without any representation or warranty of any kind, and Fitch does not represent or warrant that the report or any of its contents will meet any of the requirements of a recipient of the report. A Fitch rating is an opinion as to the creditworthiness of a security. This opinion and reports made by Fitch are based on established criteria and methodologies that Fitch is continuously evaluating and updating. Therefore, ratings and reports are the collective work product of Fitch and no individual, or group of individuals, is solely responsible for a rating or a report. The rating does not address the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned. Fitch is not engaged in the offer or sale of any security. All Fitch reports have shared authorship. Individuals identified in a Fitch report were involved in, but are not solely responsible for, the opinions stated therein. The individuals are named for contact purposes only. A report providing a Fitch rating is neither a prospectus nor a substitute for the information assembled, verified and presented to investors by the issuer and its agents in connection with the sale of the securities. Ratings may be changed or withdrawn at any time for any reason in the sole discretion of Fitch. Fitch does not provide investment advice of any sort. Ratings are not a recommendation to buy, sell, or hold any security. Ratings do not comment on the adequacy of market price, the suitability of any security for a particular investor, or the tax-exempt nature or taxability of payments made in respect to any security. Fitch receives fees from issuers, insurers, guarantors, other obligors, and underwriters for rating securities. Such fees generally vary from US$1,000 to US$750,000 (or the applicable currency equivalent) per issue. In certain cases, Fitch will rate all or a number of issues issued by a particular issuer, or insured or guaranteed by a particular insurer or guarantor, for a single annual fee. Such fees are expected to vary from US$10,000 to US$1,500,000 (or the applicable currency equivalent). The assignment, publication, or dissemination of a rating by Fitch shall not constitute a consent by Fitch to use its name as an expert in connection with any registration statement filed under the United States securities laws, the Financial Services and Markets Act of 2000 of the United Kingdom, or the securities laws of any particular jurisdiction. Due to the relative efficiency of electronic publishing and distribution, Fitch research may be available to electronic subscribers up to three days earlier than to print subscribers. For Australia, New Zealand, Taiwan and South Korea only: Fitch Australia Pty Ltd holds an Australian financial services license (AFS license no. 337123) which authorizes it to provide credit ratings to wholesale clients only. Credit ratings information published by Fitch is not intended to be used by persons who are retail clients within the meaning of the Corporations Act 2001 Fitch Ratings, Inc. is registered with the U.S. Securities and Exchange Commission as a Nationally Recognized Statistical Rating Organization (the "NRSRO"). While certain of the NRSRO's credit rating subsidiaries are listed on Item 3 of Form NRSRO and as such are authorized to issue credit ratings on behalf of the NRSRO (see https://www.fitchratings.com/site/regulatory), other credit rating subsidiaries are not listed on Form NRSRO (the "non-NRSROs") and therefore credit ratings issued by those subsidiaries are not issued on behalf of the NRSRO. However, non-NRSRO personnel may participate in determining credit ratings issued by or on behalf of the NRSRO.