Fitch Affirms Transurban at 'A-'; Outlook Stable

(The following statement was released by the rating agency) Fitch Ratings-Sydney-December 02: Fitch Ratings has affirmed Transurban Finance Company Pty Limited's senior secured bank debt and capital market facilities at 'A-'. Fitch has also assigned an 'A-' rating to Transurban's AUD1.65 billion working capital facility. The Outlook is Stable. KEY RATING DRIVERS The ratings reflect the steady traffic growth of Transurban's road assets, although the strong performance is yet to be tested through a recession, as well as the company's toll pricing, which is mainly inflation-linked in Australia but uncapped on its two US roads, and ongoing capital expenditure on its network. Transurban's debt, which is covenanted and secured, is exposed to refinance risk, but this is mitigated by a demonstrated record of capital market access. We forecast a five-year average debt/adjusted EBITDA of 4.8x under our 2018 rating case, which demonstrates reduced financial flexibility at the current rating level compared with the previous review. Traffic Untested Through Recession: Volume Risk - Midrange Transurban's steady traffic growth demonstrates the low to moderate volatility of its assets, despite the competition Australian road networks face from other modes of transport. Australian toll roads have avoided the traffic declines suffered by toll roads in other countries in the previous few years, although the resilience has not yet been tested by an economic downturn due to Australia's persistently strong economy. Traffic in Transurban's US assets has been more volatile. Mostly Inflation-Linked: Price Risk - Midrange Transurban's concessions permit toll increases at the CPI inflation rate and, in some cases, have the added protection of a price floor. The US roads use uncapped dynamic toll rates, but there appears to be little price elasticity to date. We expect traffic growth to eventually increase congestion and slow traffic, decreasing the value of using the toll roads versus competing transportation. This will make it difficult to implement maximum toll increases without hurting traffic volume. Transurban has been effectively managing this through road expansion, but the strategy may eventually reach a limit as traffic corridors are utilised. Continuous Expansion: Infrastructure Development and Renewal - Midrange Road operation and management is conventional, low-risk work performed by experienced contractors with detailed capital plans. Transurban has generally been successful in completing larger expansion projects and new roads, although the completion of the NorthConnex project in Sydney is delayed. Major development projects currently underway include the West Gate Tunnel project in Melbourne and WestConnex in Sydney, in which Transurban has a 25.5% ownership share. Capital spending requirements for the West Gate Tunnel project will be funded 50/50 debt and equity at the corporate level; however, construction risk for Transurban is mitigated by a cap on its funding contribution to the project. WestConnex concessions are significant, involving complex tunnelling works for which construction is largely progressed under fixed price and time contracts. Transurban's contribution to WestConnex is mostly equity-funded, with minimal remaining projected capex to completion. We believe the risk of Transurban's increased expansion rate in the previous few years is adequately mitigated by its appropriate management team and structure. Market Access Mitigates Refinance Risk: Debt Structure - Midrange Transurban's corporate debt portfolio consists entirely of bullet maturities. However, the company has a proven record of refinancing its debt well in advance of maturity and has successfully expanded its lender base across banks and capital markets. The lengthy concession periods for Transurban's roads help defer amortisation. Transurban also maintains a high level of interest-rate hedging on its debt portfolio and comfortably exceeds the senior interest coverage ratio covenant of 2.00x for new debt issuance and 1.25x for lockup and default. Financial Profile Most of Transurban's operating toll roads have asset-level debt, which is non-recourse to Transurban, and contribute dividend cash flow to the corporate entity. Fitch therefore uses a debt/adjusted EBITDA leverage metric to evaluate Transurban. Debt includes all corporate-level recourse debt while adjusted EBITDA includes EBITDA contributed by Transurban's toll roads in Melbourne and other corporate sources, along with dividend flow from its other project-financed ringfenced toll roads. Fitch's rating case projects five-year average debt/adjusted EBITDA of 4.8x. PEER GROUP Transurban's main peers include the European toll-road networks of Atlantia S.p.A., APRR (A-/Stable) and Abertis Infraestructuras, S.A. (BBB/Stable). Transurban's 285 kilometres of roads is short compared with peers, but its 17 roads are diversified across five major cities and three countries. Transurban's traffic has also been more robust than that of peers, having avoided significant falls over the previous decade due, in large part, to the enduring strength of Australia's economy. We have only assigned a 'midrange' attribute to Transurban's infrastructure development and renewal due to its ongoing strategy of developing new roads and widening existing ones, but the company is skilled at mitigating the risks of such expansion. Its leverage, which is projected to increase in the near term, is high against that of peers. RATING SENSITIVITIES Developments that May, Individually or Collectively, Lead to Negative Rating Action: - An increase in debt/adjusted EBITDA above 5.0x for an extended period - Failure to complete debt refinancing well in advance of scheduled maturities - Transurban extending support to a non-recourse project beyond near-term liquidity - Adverse events in relation to major upcoming construction projects, for example, cost overruns or major traffic disruption Developments that May, Individually or Collectively, Lead to Positive Rating Action: - A rating upgrade is not probable in the near term in light of the increasing leverage profile and execution risk. CREDIT UPDATE Performance Update Traffic on Transurban's Sydney toll roads rose by 3.1% in the financial year ending June 2018 (FY18), while its Brisbane toll roads saw growth of 2.6%. Traffic on Melbourne's CityLink road recovered from widening works in FY17, but was affected by ongoing state works, resulting in a modest 1.4% rise for the financial year. Traffic growth on the US toll roads slowed to 1.9%, following high growth in the previous corresponding period. The West Gate Tunnel and WestConnex construction projects progressed well, but NorthConnex is experiencing delays. Transurban has extended the average maturity of its corporate debt to 5.9 years over the previous five years, from 4.0 years, while substantially lowering the average cost. The company completed another issue under its euro medium-term note programme in November 2018, with a CAD650 million 10-year note. Fitch Cases Fitch's base case assumes that traffic across Transurban's roads will increase by an average of 4.2% over the next five years, then drop to an average of 3.3% for the following five years, reflecting the phased-in opening of WestConnex. Operating and maintenance (O&M) costs are in line with management forecasts and refinancing margins of around 170bp are assumed. The base case results in debt/adjusted EBITDA of 4.2x in FY19, rising to 5.8x in FY22, due to a drawdown of additional debt at the corporate level to fund the West Gate Tunnel project. Our rating case imposes more conservative traffic-growth assumptions, averaging at 3.0% over the next five years and 2.1% in the following five years. O&M costs are forecast to increase by 5% above management forecasts and we assume a refinancing margin of 270bp. The rating case produces debt/adjusted EBITDA of 4.7x in FY18, rising to 6.3x in FY22 then falling to 3.8x in FY23. Asset Description Transurban develops, owns and operates toll-road networks in Australia and North America. It is listed on the Australian Stock Exchange and its assets of the M1 Eastern Distributor (AMT Management Limited, senior secured rating: A-/Stable), Hills M2, M5 South-West Motorway, Westlink M7 (WSO Finance Pty Limited, senior secured rating: A-/Stable), 25.5% ownership share in WestConnex and two tunnels make up the bulk of Sydney's orbital toll-road network. Transurban's CityLink road serves as an important connection between Melbourne and the city's primary airport as well as the south-eastern suburbs. Transurban has also become the market leader in the city of Brisbane following its acquisition of Queensland Motorways in FY15. In the US, Transurban's 495 Express Lanes and 95 Express Lanes are key roads in the greater Washington, D.C. area. Transurban acquired the A25 in Montreal, Canada, in 2018. 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/10054152 Solicitation Status https://www.fitchratings.com/site/pr/10054152#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. 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