Aug 29 (Reuters) - (The following statement was released by the rating agency)
Fitch Ratings has affirmed Channel Link Enterprises Finance plc’s (CLEF) notes, as follows:
GBP300m Class G1 index-linked notes: affirmed at ‘BBB’, Outlook Stable
GBP150m Class G2 index-linked notes: affirmed at ‘BBB’, Outlook Stable
GBP300m Class G3 index-linked notes: affirmed at ‘BBB’, Outlook Stable
EUR73m Class G4 index-linked notes: affirmed at BBB’, Outlook Stable
EUR147m Class G5 index-linked notes: affirmed at ‘BBB’, Outlook Stable
EUR147m Class G6 index-linked notes: affirmed at ‘BBB’, Outlook Stable
GBP400m Class A1 fixed-rate notes: affirmed at ‘BBB’, Outlook Stable
EUR645m Class A2 fixed-rate notes: affirmed at ‘BBB’, Outlook Stable
GBP350m Class A3 floating-rate notes: affirmed at ‘BBB’, Outlook Stable
EUR953m Class A4 floating-rate notes: affirmed at ‘BBB’, Outlook Stable
The ratings reflect Groupe Eurotunnel’s (GET, the operator) continued improved financial performance following the tunnel fire in 2008, robust operational and maintenance arrangements, a protective debt structure and adequate debt service metrics. Regulatory decisions regarding GET’s charging and regulatory framework are a potential concern that Fitch will continue to monitor.
Fitch’s ratings are based on the following factors, among others:
Operation and Revenue Risk - Midrange
A key rating driver is GET’s overall performance in the heavy goods vehicle (HGV) shuttle market. The company continues to progress towards revenue levels achieved prior to the tunnel fire in September 2008 (which led to a partial closure of the tunnel until February 2009). HGV volumes for FY12 (ending 31 December 2012) improved (+16%, the same as FY11) and achieved a consistently high market share (44% currently versus 38% in FY11), although the general market is c.10% off 2007’s peak. Average yields also continue to improve, although they remain below the pre-fire peaks. For H113, volumes fell (-7%) on the back of increased competition in the Short Straits market. However, total CLEF revenues are marginally up (+1%), helped by improved HGV yields and a general increase in the market. Other key revenue lines also improved in FY12. Eurostar-derived passenger volumes improved 2% (+2% in FY11) and car shuttle volumes also rose by 7% (+6% FY11). For H113, Eurostar and car shuttle volumes were up 2% (3%) and 2% (3%), respectively.
Whilst still subdued, competiton from other modes of transport, particularly ferries, has strengthened slightly. MyFerryLink, GET’s leasing/maritime operation established by the acquisition of three ferries from the bankruptcy of SeaFrance, has faced a major regulatory setback. Despite a favourable ruling from the French Competition Authority, in June 2013, the UK Competition Commission ruled that MyFerryLink’s operations were anti-competitive and gave notice that operations would have to cease at the Port of Dover in December 2013. However, Fitch understands that GET will contest the decision. The impact on CLEF is limited, given that MyFerryLink’s operation are outside the ringfence.
GET is well-experienced in operating and maintaining the Channel Tunnel, which is a unique asset, and benefits from strong oversight by both UK and French governments through a joint regulator (the Intergovernmental Commission (IGC), together with the Channel Tunnel Safety Authority). Although opex increased in FY12 (+13% for CLEF), it fell marginally in H113 (2%). The company also continues to exercise a good level of cost control through the cycle (since 2008, costs have risen by 3% despite a 23% increase in shuttle volumes).
Meanwhile, capex appears to be reasonable, focused on key projects such as sprinkler zones, locomotive updates and communication systems, albeit on an unreserved basis. This is mitigated by a minimum capex spend of EUR35m p.a., 2007 indexed.
Following a complaint lodged by Eurostar with the IGC, the European Commission (EC) announced in June 2013 that, among other things, GET’s track access charges (TACs) were excessive and that the IGC was not an independent regulator (as its constituent members, the UK and France, are also the project’s grantors). Although the company has rebutted these claims in several areas (including benchmarked infrastructure cost, GET’s compliance with all concession requirements and the company’s attempts to encourage greater volumes through the tunnel), it is clear that further discussion between all parties will be necessary before the end of 2013. Fitch will closely monitor developments.
Debt Structure - Stronger
CLEF’s debt structure consists of a typical issuer-borrower structure. Debt is largely fixed rate and amortising (some back-ended profiles), with a significant tail to the concession (36 years). There is an element of index-linked debt, although the agency notes that some natural hedging appears to exist. CLEF now pays a step up margin of an additional 200 basis points on its floating rate notes (class A3 and A4). Given current capital market pricing dynamics, GET has expressed no immediate desire to refinance these tranches, and has strategically purchased EUR165m of these bonds at a discount in secondary trading.
Debt Service - Midrange
Given that GET is exposed to 100% volume and price risk, Fitch has developed a conservative rating case (high capex, repeated recession assumptions, limited yield growth). Specifically, Fitch assumes capex for a total replacement of shuttles, whereas the project’s TA stated that an interim refit could push replacement past debt maturity. Fitch concludes that GET is performing in line with the rating case established at financial close. The covenant compliance certificate presented by the company shows the senior debt service coverage ratio (DSCR) at 1.63x for the period ended June 2013 (including margin step up on FRNs). This is slightly below 1.74x for the year ended June 2012, but remains comfortably above the current covenant of 1.10x (reduced from 1.20x in June 2012 as stipulated in the transaction documents). The forecast rating case average DSCR and minimum loan life cover ratio (LLCR) are 1.4x and 1.2x, respectively
Average DSCR and loan life coverage ratio (LLCR) are broadly in line with the rail projects in the peer group (High Speed Rail Finance (1) PLC (HS1; A-/Stable), City Greenwich Lewisham Rail Link plc (CGLR; BB+/Stable) and other private high speed rail projects). Compared with a volume-driven public project (CGLR), CLEF benefits from some contractual protection on shuttle volumes, in addition to the highly stable Eurostar demand. There are clear similarities with HS1, the UK link to the Channel Tunnel, although GET does not benefit from having 60% of its revenues supported by the UK government via underpinned “availability” payments for domestic rail. However, the two projects do share Eurostar volumes, which are considered reliable. GET’s 36-year tail is in excess of that offered by any peer, emphasising the value of this feature to the transaction. Overall, CLEF is well placed in the ‘BBB’-range.
A negative shock (i.e. macroeconomic, competitive, physical damage) that resulted in significant loss of volumes through the tunnel and a sustained weakening in financial performance could result in negative rating action. Fitch may also take action if there is an unfavourable outcome from the EC’s review of TACs and regulation of the tunnel.
Conversely, substantial and sustained overperformance of Fitch’s rating case could result in positive rating action, although Fitch does not consider this likely in the near term
CLEF is the issuing vehicle of the refinancing of the GET group, the concessionaire and operator of the Channel Tunnel, the fixed transportation link between the UK and France in operation since 1994. GET primarily derives its revenues from its own truck and passenger shuttle services and as infrastructure operator for railway services (passengers using the separately operated Eurostar).