(The following statement was released by the rating agency)
Jan 15 - Fitch Ratings has assigned PKP Intercity S.A. (PKP IC), Poland’s largest long-distance train operator, a Long-term foreign currency Issuer Default Rating (IDR) of ‘BBB-', Long-term local currency IDR of ‘BBB’ and a National Long-term rating of ‘A(pol)’ with Stable Outlooks.
Fitch assesses PKP IC’s ratings as three notches below Poland’s Long-term foreign and local currency IDRs (‘A-'/Stable and ‘A’/Stable) due to the strong legal links and the involvement of the company’s shareholder, the state treasury, in PKP IC’s financial and operational functions.
State Ownership and Guarantees
The state owns a 65.7% stake in PKP IC. The remaining stake is owned by fully state-owned Polish railways company Polskie Koleje Panstwowe S.A. (foreign and local currency IDRs of ‘BBB’/Stable and ‘BBB+'/Stable). At end-September 2012, 37% of PKP IC’s debt was guaranteed by the state. Fitch expects that the share of state-guaranteed debt will increase to well above 50% by end-2014 as the company raises new state-guaranteed loans for investments in rolling stock and related assets.
Strategy and Capex Plan
The government exerts significant influence over PKP IC’s operations, for example, by preparing the long-term strategy for the railway sector and approving the company’s capex and funding plans. PKP IC’s large capex plan of PLN4.1bn for 2013-2015 is supported by the government within a broader plan of modernising the Polish railway sector using a combination of available EU funds, external funding and own sources. The government considers infrastructure investments, including investments in the railway system and rolling stock, a strategic priority.
Public Service Contracts
PKP IC generates about 50% of its revenue (53% in 2011) and the majority of its passenger transport volumes (78% in 2011) from two long-term public service contracts (PSC) signed with the Ministry of Transport, Construction and Maritime Economy. The government pays compensation for unprofitable interregional and international trains operated within these two PSCs. Fitch notes that despite an improvement in the compensation mechanism in 2011 due to the addition of a reasonable profit, compensation received within the PSCs is insufficient to fully cover costs and provide adequate remuneration for PKP IC.
‘B’ Category Standalone Rating
Fitch considers PKP IC’s standalone financial profile as commensurate with ratings in the ‘B’ category. This is due to the large, partly debt-funded capex plan resulting in a substantial weakening of expected leverage and interest coverage ratios in 2013-2015. In addition, the funding structure of the company’s largest ongoing investment project, the purchase of 20 high-speed trains and related assets for PLN2.1bn (the ETR 610 project), has not yet been finalised as discussions with the European Commission about the share of EU funding for the project have not concluded. By 2015, most of the company’s debt is likely to be euro-denominated while revenues are denominated mainly in Polish zlotys, which exposes PKP IC to currency risk.
Rising Share of Encumbered Assets
Fitch also notes that at end-December 2011, 16% of the company’s property, plant and equipment was encumbered as security for external debt or as security for the state treasury for state guarantees granted to the company. The agency expects the share of encumbered property, plant and equipment to increase by 2015 as the company raises additional debt, most of which will be state-guaranteed, resulting in additional security on PKP IC’s assets for the state treasury.
EBITDA and FFO Fluctuations
Fitch expects PKP IC to report much weaker EBITDA and funds from operations (FFO) in 2013 compared with 2012 partly because increased costs will not be fully covered by PSC subsidies for 2013 (based on the level set in August 2012). Higher costs in 2013 will stem from a large increase in both the cost of access to the railway infrastructure and the cost of rolling stock modernisation, while the PSC subsidies only rise marginally. The agency projects PKP IC’s EBITDA will recover in 2014 due to higher PSC subsidies and the commissioning of the high-speed ETR 610 trains.
Funding from EIB
The European Investment Bank (EIB) is PKP IC’s main lender. As of end-September 2012, a EUR50m loan from EIB, guaranteed by the state, accounted for 37% of total debt. In 2011, EIB granted PKP IC a EUR224m loan to co-fund the ETR 610 project. This loan will be guaranteed at the time of initial drawing. The state will guarantee 80% of the loan amount and related interest on a commercial basis, while the remaining 20% will be guaranteed by a bank.
The ratings are based on Fitch’s assumptions that PKP IC will successfully close the funding for the ETR 610 project in a timely manner, if needed, by increasing the amount of the EIB loan for the project following conclusion of discussions with the European Commission. The agency expects that based on the current level of PSC subsidies for 2013, the company may not be able to meet its financial covenants at end-December 2013 defined in the bond issue agreements with banks. Fitch assumes that the company would be able to agree waivers or renegotiate the covenants, perhaps with the government’s assistance as EIB loans include cross default clauses.
At end-September 2012, PKP IC had PLN132m cash and PLN80m unused committed short-term bank lines against short-term debt of PLN132m. The company’s debt maturity profile is well spread over the next 13 years. Negative FCF in 2013-2015 due to large investments will be covered with bank loans, mainly from EIB, and EU funds.
Positive: Future developments that could lead to positive rating action include:
- An upgrade of Poland’s sovereign rating.
- Improved cost recovery and remuneration under the PSC agreements.
- Stronger links with the state, for instance tangible support in the form of a large equity increase.
Negative: Future developments that could lead to negative rating action include:
- A downgrade of Poland’s sovereign rating.
- A substantial increase in the share of PKP IC’s unguaranteed debt.
- Evidence of reduced state support.
- Failure to close the funding for the ETR 610 project in a timely manner.
- Failure to receive planned EU funds for any of the large capex projects, unless the company decides to cancel any of them.