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

(The following statement was released by the rating agency) Fitch Ratings-Sydney-May 27: 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. KEY RATING DRIVERS 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 amount 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 about 5.0x net debt/EBITDA in the financial year ending June 2020 (FY20), which is comparable with similarly rated peers and, along with a balance of stronger and midrange key risk driver attributes, is appropriate for an 'A' rating category, according to Fitch's Toll Roads, Bridges and Tunnels Rating Criteria. 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 decade. The Westlink M7's toll rate of around AUD0.20-0.40 a 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, with truck tolls increasing at 3x the toll for cars following the financial close of Sydney's NorthConnex road-tunnel project. Westlink M7's tolls have been raised at the maximum allowed without any political interference. The road has had full electronic tolling since it opened, facilitating quarterly toll increases. Toll growth would be constrained if Australia entered a prolonged 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 experienced parties. It follows rigorous planning and periodic review by external consultants and is approved by Westlink M7's board. A maintenance reserve is required by debt documents. The road capacity is able to accommodate medium-term traffic forecasts. Well-Managed Refinancing Risk: Debt Structure - Midrange All rated debt is senior and ranks pari passu, with little exposure to interest-rate risk. The bullet debt structure, while typical of the Australian market, is a weaker attribute. However, refinancing risk is mitigated by the quality of the asset, long concession period, proven 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 1.9x, indicating a strong ability to retire debt. Net debt/EBITDA is at 4.7x in FY19 in Fitch's rating case, rising to a peak of 5.0x in FY20, due to potential re-gearing. Fitch's analysis shows that the metrics are resilient to interest-rate stress, low inflation and traffic-stress scenarios. RATING SENSITIVITIES Future Developments That May, Individually or Collectively, Lead to Negative Rating Action: - A leverage profile above Fitch's expectations, with the ratio of net debt/EBITDA rising above 6.0x for a sustained period in Fitch's rating case. - Negative developments in the NorthConnex project that negatively affects 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: - Faster deleveraging than Fitch expects, with net debt/EBITDA falling below 4.5x for an extended period in Fitch's rating case. CREDIT UPDATE Performance Update Traffic growth was 3.2% in FY18 (FY17: 3.6%), broadly in line with Fitch's base-case forecast of 3.3%, producing growth in toll revenue of 10.5% and EBITDA of 11.0%. The higher revenue was driven by inflationary toll increases along with the full-year impact of the truck-toll multiplier, which reached 3x the car toll on 1 January 2017. Traffic growth slowed in the 2H18, with traffic up by 2.0% against Fitch's rating-case forecast of 2.8%. Net debt/EBITDA was 4.2x, slightly lower than Fitch expected in its rating case. NorthConnex Project - Construction Completion Delayed The NorthConnex project, which has common ownership with Westlink M7, reached financial close in early 2015 and commenced construction in mid-2015. The agreement with the New South Wales state government allows Westlink M7 to benefit from an increase in its truck toll to 3x the car toll, from 1x; in line with most other Sydney toll roads. It also received an 11.4-year extension in its concession term, which now ends in 2048. However, the Westlink M7 benefits will terminate upon a default on the NorthConnex project that leads to Roads and Maritime Services (the government grantor) exercising its step-in rights. We have taken the ongoing uplift to Westlink M7 related to the NorthConnex project into account in our rating case, as we believe major construction risk is adequately mitigated. Lend Lease Bouygues (PA:BOUY) Joint Venture, the design and construction contractor, encountered a number of challenges in the excavation phase of the project that delayed the construction programme. However, with the agreement of the government grantor, the completion date under the NorthConnex design and construction contract has been extended from December 2019 to mid-2020. The project remains on track to come within the original forecast cost, despite the delay. Fitch Cases The Fitch base case assumes annual traffic growth averages at 2.5% during FY20 to FY29 and 0.3% during the remainder of the concession from FY30 to FY48. CPI is assumed at 1.8% in 2019 and 1.9% in 2020, increasing to 2.0% from 2021. The projected refinancing margin is 200bp, with the base rate gradually increasing to 4.5% by 2027, from around 1.9% currently. 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 2.1x, 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 base-case assumptions: - Decrease in traffic growth, such that annual growth averages 1.9% during FY20 to FY29 and 0.2% during FY30 to FY48 - Increase in the refinancing margin by an additional 50bp, reaching 250bp - 5% increase in operating and maintenance costs and major maintenance costs in each year Fitch's rating case incorporates the longer concession and higher truck-toll multiplier from the NorthConnex project as well as the additional debt WSO Finance is able to issue. These ongoing benefits are dependent on successful completion of NorthConnex. 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 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/10076786 Solicitation Status https://www.fitchratings.com/site/pr/10076786#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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