Fitch Rates WSO Finance's MTN Programme 'A-'; Outlook Stable

(The following statement was released by the rating agency)SYDNEY/LONDON, July 14 (Fitch) Fitch Ratings has assigned WSO Finance Pty Limited's (WSO Finance) AUD1.5bn medium-term note (MTN) programme a final rating of 'A-' with Stable Outlook. The rating is aligned with the ratings on WSO Finance's existing senior secured debt.Debt issued under the MTN programme will rank pari passu with existing senior debt and net proceeds will be used to make distributions to shareholders, for general corporate purposes and/or to prepay existing debts of WSO Finance. The final rating on the programme follows receipt of final documents conforming to information already received. The rating is assigned only to the programme. There is no assurance future notes issued under the programme will be assigned a rating or that the rating assigned to a specific issue under the programme will have the same rating as the programme. Fitch's rating case assumes only a portion of the programme's AUD1.5bn limit will be issued in the near-term.The rating is supported by the importance of the Westlink M7 as an integral link in Sydney's orbital road network and Fitch's expectation that project cash flows can comfortably service debt, even in conservative downside scenarios. Traffic and revenue increased steadily in the five years to June 2015, with average annual growth rates of 5.2% and 8.5%, respectively. Growth has accelerated in the last two years, driven by increased truck tolls following the financial close of the NorthConnex project and by continued strong traffic growth and regular toll increases. Average daily traffic rose by 7.4% in the nine months to March 2016 compared with the same period a year earlier, while total toll revenues jumped by 27.1%.KEY RATING DRIVERSRevenue Risk - Volume: Stronger Traffic on the Westlink M7 rose strongly by 8.1% in the financial year ended 30 June 2014 (FY14), following slower growth in FY12 and FY13, which was due to expansion works on the adjoining M2 and M5 motorways. The strong performance has continued, with traffic rising 7.2% in FY15 and 7.4% in the nine months to March 2016, continuing a record of uninterrupted annual growth since the road opened in 2005. Fitch expects traffic to continue increasing, although at a slower pace, from FY17, with a longer-term benefit from the completion of the NorthConnex project, which will link the orbital network to major roads extending north from Sydney, to materialise in late 2019. Revenue Risk - Price: MidrangeWestlink M7 has continued to raise tolls at the maximum allowed under the concession agreement, in line with consumer price inflation. These increases, along with higher truck tolls following the financial close of the NorthConnex project, have helped drive toll revenues which increased 15.1% in FY15 and 27.1% in the nine months to March 2016, substantially exceeding traffic growth levels. The M7 has had fully electronic tolling since it opened, facilitating quarterly toll increases. Fitch believes toll growth would be constrained if Australia entered a period of low inflation. Debt Structure Risk: MidrangeThe bullet debt structure, while typical of the Australian market, is a weaker attribute compared to some other global Fitch-rated toll roads. However, WSO Finance has a proven record of refinancing debt in advance of maturity and is assisted in that regard by its shareholders, Transurban (50%, rating on Transurban Finance Company Pty Limited debt is 'A-'/Stable), QIC on behalf of its managed clients (25%) and Canada Pension Plan Investment Board (25%). WSO Finance refinanced all its senior debt with a syndicate of 10 banks in August 2014, lowering its average debt margin and substantially extending the average term to maturity. WSO Finance 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. Infrastructure Development and Renewal Risk: StrongerWestlink's major maintenance programme is reviewed periodically by Advisian - a global infrastructure advisory firm - and approved by Westlink M7's board. Asset class reviews are performed regularly with the participation of Transurban. Lendlease is contracted for everyday operations and management, but 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. Debt ServiceFinancial metrics are consistent with an 'A' category rating. Fitch has evaluated WSO Finance on a synthetic annuity 25-year debt service coverage ratio (DSCR) and concession life cover ratio (CLCR) as well as leverage due to the lack of scheduled amortisation and the existence of a finite end-date on the concession. Fitch's rating case has incorporated the longer concession and higher truck toll multiplier resulting from the NorthConnex project. While those ongoing benefits are dependent on successful completion of NorthConnex, the project is currently on time and on budget, and key project risks are adequately mitigated. The rating case also takes into account future issuances of debt by WSO Finance. While this includes amounts issued under the MTN programme, in the near term such amounts would be only a portion of the AUD1.5bn programme limit. The minimum CLCR over the next ten years in Fitch's rating case is 3.0x which, along with average annuity DSCR of 3.7x, indicates a strong ability to retire debt. Net debt/cash flow available for debt service (CFADS) is at 5.7 in FY16 in Fitch's rating case, dropping to 4.6 by FY19. The transaction is resilient to interest rate stress scenarios.PeersThe closest peer for Westlink M7 is Sydney-based AMT Management Limited (Eastern Distributor) (AMT, A-/Stable). The two roads have similar concession terms and leverage levels. AMT has a higher projected minimum CLCR, but lower levels of debt coverage based on Fitch's annuity amortisation profile. AMT is a more mature road, with longer operating and traffic history, but recent traffic and revenue growth have been lower than for Westlink M7. Fitch has also compared Westlink M7 to two toll road issuers in Europe: Atlantia S.p.A (A-/Stable) and SIAS S.p.A. (BBB+/Stable). Both road networks are much larger than Westlink M7 and have had more volatile traffic flows in the past ten years, although Westlink M7's resilience in a downturn has not been tested due to Australia's long run of economic growth. Westlink M7 has higher leverage than Atlantia and Sias, but also a longer concession tenor and Stronger assessment on Volume Risk. RATING SENSITIVITIESWSO Finance's ratings would come under downward pressure if net debt/CFADS rises above 6.0 for a sustained period in Fitch's rating case, such as in the event of prolonged weakening in traffic, operational difficulties or due to additional borrowing, or if there was any difficulty in refinancing debt as it matures. Negative developments in the Northconnex project that affect Westlink M7 could also negatively weigh on the rating. A rating upgrade may be considered if net debt/CFADS falls below 4.5 for an extended period, both historically and on a projected basis, in Fitch's rating case.SUMMARY OF CREDITWestlink M7 is a 40km toll road that runs north-south through Sydney's western suburbs and forms a critical link in Sydney's 110km 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. Contacts:Primary AnalystDavid CookDirector+61 2 8256 0363Fitch Australia Pty LtdLevel 15, 77 King Street, Sydney NSW 2000Secondary AnalystJames HodgesAnalyst+44 203 530 1278Committee ChairpersonIan DixonManaging Director+44 20 3530 1815Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com; Leslie Tan, Singapore, Tel: +65 67 96 7234, Email: leslie.tan@fitchratings.com.Additional information is available on www.fitchratings.comApplicable Criteria Rating Criteria for Infrastructure and Project Finance (pub. 08 Jul 2016)https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=882594Rating Criteria for Toll Roads, Bridges and Tunnels (pub. 29 Sep 2015)https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=870170Additional Disclosures Dodd-Frank Rating Information Disclosure Form https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr _id=1008864Solicitation Status https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1008864Endorsement Policy https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&det ail=31ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S FREE 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. 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. Fitch Australia Pty Ltd holds an Australian financial services licence (AFS licence no. 337123) which authorises 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.