Fitch Affirms WSO Finance Pty Limited at 'BBB+'; Outlook Stable

(The following statement was released by the rating agency)SYDNEY, September 15 (Fitch) Fitch Ratings has affirmed the ratings of WSO Finance Pty Limited's (WSO Finance) senior secured bank debt facilities, comprised of the following:AUD520m tranche A loan due August 2017 affirmed at 'BBB+'; Outlook Stable;AUD525m tranche B loan due August 2019 affirmed at 'BBB+'; Outlook Stable; andAUD225m tranche C loan due August 2021 affirmed at 'BBB+'; Outlook Stable.The affirmation of WSO Finance's senior bank loan ratings is supported by the importance of the Westlink M7 as an integral link in Sydney's orbital road network, both for local and regional traffic, and by the expected ability of project cash flows to service debt comfortably even in conservative downside scenarios.KEY RATING DRIVERSThe Westlink M7 acts as an important road link for Sydney and interstate traffic. The road serves the expanding suburbs and business areas of western Sydney, and links the M5, M2 and M4 motorways. In addition, the Westlink M7 is a major freight corridor that links the major southern and northern national highways in Sydney's west. Westlink M7 experienced subdued traffic growth of 1.3% in FY12 (year ending 30 June) and 3.4% in FY13, due to a combination of construction works on the adjoining Hills M2 and M5 motorways and slower economic growth. However traffic growth rebounded sharply to 8.1% in FY14 and 7.1% in FY15 following completion of the construction works. Fitch expects slower but steady traffic growth in the low to mid-single digits over the medium term. Volume risk is assessed as "Midrange".Westlink M7 has continued to raise tolls at the maximum allowed under the concession agreement, generally in line with consumer price inflation. Also, as allowed under the agreement with the New South Wales government to build the new NorthConnex road project (which has common ownership with Westlink M7), WSO is raising the heavy vehicle toll to a multiple of three times the car toll progressively over nine quarters, with the increase to become permanent following completion of NorthConnex. These increases have helped drive toll revenues, with FY15 growth of 12.9% exceeding traffic growth levels. Toll growth would be constrained if Australia entered a period of low inflation. Price risk is assessed as "Midrange".While typical of the Australian market, the bullet debt structure is a weaker attribute compared to some other global Fitch-rated toll roads. However, WSO has a proven track record of refinancing debt in advance of maturity, and is assisted in that regard by its shareholders, Transurban (50%, A-/Stable), QIC on behalf of its managed clients (25%), and Canada Pension Plan Investment Board (25%). In August 2014, WSO refinanced all of its senior debt with a syndicate of 10 banks, lowering its average debt margin and substantially extending the average term to maturity. WSO benefits from its shareholders' global banking relationships and capital markets experience. Structural features include a reserve account for major maintenance and minimum interest hedging of 75% of outstanding debt. The Debt Structure risk attribute is assessed as "Midrange".Westlink's major maintenance program is reviewed on a periodic basis by Advisian - a global infrastructure advisory firm, and approved by Westlink M7's board. Asset class reviews are performed regularly with the participation of 50%-owner, Transurban. While Lend Lease is contracted for everyday operations and management, major expenditures such as re-sheeting are put out for tender. Westlink benefits from Transurban's scale in negotiating with Australian contractors. A maintenance reserve is required by current debt documents. Infrastructure renewal is assessed as "Stronger".Financial metrics are good for a 'BBB' category rating. Given the lack of scheduled amortisation and the existence of a finite end date on the concession, Fitch has evaluated WSO on a synthetic annuity 20 year debt service capital ratio (DSCR), and concession life cover ratio (CLCR), as well as gearing. Fitch has also taken into consideration the potential for additional debt to be raised by WSO Finance, as allowed by the government following financial close of the NorthConnex project. The CLCR in Fitch's rating case is 2.2x which, along with an average annuity DSCR of 2.3x, indicates a strong ability to retire debt. Net debt/CFADS is at 6.3 in FY16 in Fitch's rating case, with future leverage dependent on WSO Finance's debt level. Finally, the transaction is resilient to interest rate stress scenarios. RATING SENSITIVITIESThe rating is constrained by its higher leverage compared to other Fitch-rated roads, including AMT Management Limited (A-/Stable) in Sydney. While Westlink M7's location in a high growth area of Sydney can provide upside in a positive economic environment, this may also create greater volatility in the event of an economic downturn. WSO Finance's ratings could come under downward pressure in the event of prolonged weakening in traffic or operational difficulties that result in net debt/CFADS rising above 7.0 for a sustained period in Fitch's rating case, or if there was any difficulty in refinancing debt as it matures. A rating upgrade would be considered if operations improved such that net debt/CFADS fell below 6.0 in Fitch's rating case for a sustained period.Contact:Primary AnalystDavid CookDirector+61 2 8256 0363Fitch Australia Pty LtdLevel 15, 77 King Street, Sydney NSW 2000Secondary AnalystDanilo QuattromaniDirector+39 02 879087 275Committee ChairpersonStefan BaatzSenior Director+44 20 3530 1134Media Relations: Leni Vu, Sydney, Tel: +61 2 8256 0304, Email: leni.vu@fitchratings.com.Additional information is available on www.fitchratings.comApplicable Criteria Rating Criteria for Infrastructure and Project Finance (pub. 12 Jul 2012)https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=682867Rating Criteria for Toll Roads, Bridges and Tunnels (pub. 20 Aug 2014)https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=758708Additional Disclosures Dodd-Frank Rating Information Disclosure Form https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr _id=990807Solicitation Status https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=990807Endorsement Policy https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&det ail=31ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. 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