Fitch Affirms WSO Finance Pty Limited at 'A-'; Outlook Stable

(The following statement was released by the rating agency) Fitch Ratings-Sydney/London-May 31: Fitch Ratings has affirmed the 'A-' rating on the senior secured debt issued by WSO Finance Pty Limited, the financing vehicle for the Westlink M7 motorway in Australia. The Outlook is Stable. The 'A-' rating reflects the key role Westlink M7 plays in the mobility of the greater Sydney area, its solid traffic performance as well as its moderate current and projected leverage when assessed in the context of its long concession that ends in 2048. Traffic has exhibited low volatility and strong growth while tolls have been increased at the maximum allowed under the concession agreement. Its bullet debt structure entails refinancing risk, although this is mitigated by proactive debt management and well-established access to banks and capital markets. Fitch's rating case forecasts peak leverage of 5.2x net debt/EBITDA for WSO Finance in 2020, which is comparable with similarly rated peers and is appropriate for an 'A' rating category according to Fitch's Toll Roads, Bridges and Tunnels Rating Criteria. KEY RATING DRIVERS Proven Traffic Base: Revenue Risk (Volume) - Stronger The Westlink M7 is an important link in Sydney's orbital road network, connecting western Sydney with the M2 toll road serving northern Sydney, the M5 to the south, and the M4, which extends into central Sydney. Westlink M7 has exhibited steady, strong traffic growth since it opened in 2005, with no traffic decreases recorded over any 12-month period despite toll-rate increases that are consistently at the maximum allowed under the concession. Western Sydney has had substantially higher growth in both population and employment than the city overall over the past five years, and we expect the outperformance to continue over the next 10 years. The Westlink M7's rate of around AUD0.20-0.40 per kilometre (depending on distance driven), is towards the lower end of Sydney toll roads. Maximising Toll Rates in Line with Inflation: Revenue Risk (Price) - Midrange The concession agreement allows for toll increases in line with consumer price inflation. Following financial close of the NorthConnex road tunnel project in the Sydney area, truck tolls were allowed to increase gradually to three times the toll for cars. Westlink M7's tolls have been raised at the maximum allowed without any political interference. Westlink M7 has had fully electronic tolling since it opened, facilitating quarterly toll increases. Toll growth would be constrained if Australia entered a period of low inflation. Strong Maintenance Programme: Infrastructure Development and Renewal - Stronger Westlink M7's major maintenance programme is straightforward, non-complex work carried out by highly experienced parties. It follows a rigorous planning process and periodic review by external consultants and is approved by Westlink M7's board. A maintenance reserve is required by current debt documents. The road capacity is able to accommodate medium-term traffic forecast. Well-Managed Refinancing Risk: Debt Structure - Midrange All rated debt is senior and ranks pari passu with currently no material exposure to interest-rate risk. The bullet debt structure, while typical of the Australian market, is a weaker attribute. However, the refinancing risk is mitigated by the quality of the asset, long concession period, proven track record of refinancing debt in advance of maturity and shareholders' global banking relationships and capital market experience. Structural features include a reserve account for major maintenance and minimum interest hedging of 75% of outstanding debt. Financial Profile Fitch's metrics analysis focuses on leverage and concession life cover ratio (CLCR) due to the lack of contractually scheduled amortisation and the existence of a finite end-date on the concession. The minimum CLCR in Fitch's rating case, which incorporates management's plan to amortise debt over the final 10 years of the concession, is 2.2x, indicating a strong ability to retire debt. Net debt/EBITDA is at 4.4x in the financial year ending 30 June 2018 (FY18) in Fitch's rating case, rising to a peak of 5.2x in FY20, reflecting the planned re-gearing. Fitch's analysis has demonstrated that the metrics are resilient to interest rate stress, low inflation, and traffic stress scenarios. PEER GROUP The closest peer for Westlink M7 is Sydney-based AMT Management Limited (A-/Stable), which operates the Eastern Distributor toll road under a concession that ends in 2048. The two roads have similar concession terms and leverage levels. AMT is a more mature road with longer operating and traffic history, but its recent traffic and revenue growth have been lower than for Westlink M7. Fitch has also compared Westlink M7 to Autoroutes Paris-Rhin-Rhone (APRR; A-/Stable). APRR's road network of over 2,300 km in France is much larger than Westlink M7, but its remaining concession life of 18 years is much shorter than Westlink M7's 30 years. APRR is also assessed as 'Stronger' for Revenue Risk (Volume) due to its substantial traffic resilience in the global financial crisis, although Fitch notes that Westlink M7's resilience in a downturn has not been tested due to Australia's long run of economic growth. Leverage is similar for the two issuers with net debt/EBITDA of around 4x-5x. 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 rising above 6.0x for a sustained period in Fitch's rating case; - Any negative development in the NorthConnex project with material negative impact on Westlink M7's projected metrics; - Inability to prefund well in advance of bullet debt maturities. Future Developments That May, Individually or Collectively, Lead to Positive Rating Action: - A faster-than-expected deleveraging profile with net debt/EBITDA falling below 4.5x for an extended period in Fitch's rating case. CREDIT UPDATE Performance Update Traffic growth was 3.6% in FY17, producing growth in toll revenue of 16.8% and EBITDA of 15.4%. The higher revenues were driven by inflationary toll increases along with an increase in the truck toll multiplier, which reached 3x the car toll on 1 January 2017. Traffic growth has continued in the nine months to March 2018, with traffic up 3.2% compared with the year-earlier period. Net debt/EBITDA was 4.6x in FY17, lower than expected in the rating case from our previous review. In January 2017, Westlink commenced resurfacing (resheeting) the entire 40 km motorway in two stages. The project was originally scheduled to be completed in FY19 with a total cost of AUD33 million. However, the project is ahead of schedule and Westlink now expects it to be completed by June 2018 (weather permitting) at a cost that is AUD1 million below the budget. The main contractor for the project is Downer EDI Limited (BBB/Stable). Traffic disruption from the resurfacing has been minimal as most of the work is carried out at night. NorthConnex Project - On Time and Budget The NorthConnex project, which has common ownership with Westlink M7, reached financial close in early 2015 and commenced construction in mid-2015. An agreement with the New South Wales state government allows Westlink M7 to benefit from an increase in its truck tolls to 3x the car toll from 1x, in line with most other toll roads in the Sydney area. It also received an 11.4-year extension in its concession term, which will now end in 2048. However, the Westlink M7 benefits would terminate in the event that there is a default on the NorthConnex project that leads to RMS (the government grantor) exercising its step-in rights. The ongoing uplift to Westlink M7 related to the NorthConnex project has been taken into account in the rating case as, in our view, major construction risks are adequately mitigated. NorthConnex has now been under construction for three years, and is on budget and on track for completion by the end of 2019. The project is being built by highly experienced contractors - Bouygues (PA:BOUY) and Lendlease Corporation Limited (BBB-/Stable). Fitch Cases The Fitch base case assumes annual traffic growth averages 2.3% during FY19 to FY28, and 0.6% during the remainder of the concession from FY29 to FY48. CPI inflation is assumed at 2.2% during 2018 and 2019, dropping to 2.0% from 2020. 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 leverage peak of 4.9x on a five-year forecast horizon and a minimum CLCR of 2.3x, taking into account WSO Finance's planned amortisation schedule over the final 10 years of the concession. The Fitch rating case makes the following adjustments to the base case assumptions: - Decrease in traffic growth, such that the annual growth averages 1.6% during FY19 to FY28, and 0.1% during FY29 to FY48 - Increase in refinancing margins by an additional 50bp, reaching 250bp - 5% increase in operating and maintenance, and major maintenance costs in each year Fitch's rating case incorporates the longer concession and higher truck-toll multiplier resulting from the NorthConnex project as well as the additional debt that WSO Finance is able to issue. Those ongoing benefits are dependent on successful completion of NorthConnex, which is currently on time and on budget and the execution risks are adequately mitigated. Asset Description Westlink M7 is a 40-kilometre toll road that runs north-south through Sydney's western suburbs and forms a critical link in Sydney's 110-kilometre orbital network. Westlink M7 links major residential growth centres, distribution centres and areas of industrial development in Sydney's west and connects three of Sydney's busiest motorways, the M2, M4 and M5. 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 Analyst +44 203 530 1278 Committee Chairperson Jelena Babajeva Senior Director +44 203 530 1375 Media Relations: Athos Larkou, London, Tel: +44 203 530 1549, Email: athos.larkou@fitchratings.com; Leslie Tan, Singapore, Tel: +65 67 96 7234, Email: leslie.tan@fitchratings.com. 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