oThe COVID-19 pandemic has caused a drop of 90% in
oWe expect that following the COVID-19 lockdown, demand for TfL's services will recover slowly due to subdued activity in the international tourism, retail, and leisure sectors and increasing work-from-home trends.
oStructurally lower EBITDA generation and higher debt service obligations as a result of additional borrowing to fund the COVID-19-related revenue shortfall and Crossrail cost overruns will reduce TfL's debt service coverage and considerably increase its debt burden, in our view.
oWe are therefore lowering our long-term issuer credit rating to 'A+' and our short-term issuer credit rating to 'A-1' on TfL. The outlook remains negative.
At the same time, we lowered to 'A+' our issue rating on TfL's senior unsecured debt.
The downgrade reflects our expectation that TfL's debt service coverage will structurally weaken over the next two-to-three years, due to lower-than-previously-anticipated demand for its services and a higher debt burden. As a result of the social-distancing measures applied to arrest the COVID-19 outbreak, ridership on the
We expect that over the next three years, ridership will not recover to historical levels of 4 billion passenger journeys per year. Over the past two months, as a direct effect of COVID-19, passenger numbers on TfL's underground network have fallen by around 95%, and those on the bus network are down 85%. We expect that after the lockdown, the steep drop in ridership will be followed by a gradual recovery due to slower economic development and subdued economic activity, increasing work-from-home trends, and a further delay to Crossrail. Our current base case for global air passengers (see "The Coronavirus Pandemic Could Reduce Global Air Passengers By Up To 30% In 2020," published
Our new base case assumes a decline of over 50% of TfL's operating revenue in the fiscal year (FY) ending
We now expect the opening of the central section of the Elizabeth line will be delayed into 2022, although TfL is still targeting completion in 2021. The group has stopped all nonessential construction projects, including the Crossrail project, for which extraordinary funding has not yet been agreed with the government. We believe that TfL will meet its already-committed large-scale projects, but will now reconsider investments in new projects, and will reduce its overall capital expenditure (capex) ambitions.
Based on our calculations, we expect that TfL will require £3.2 billion of funding throughout FY2021, which will be covered by a combination of accumulated cash, extraordinary grants, and additional borrowings. TfL has already drawn significantly on its cash over the past two months to support operations. We estimate cash has decreased by about £900 million and now stands at around £1.2 billion, compared with £2.1 billion at the close of FY2020. We expect the remaining funding gap of £2.3 billion will be covered by the DfT's £1.9 billion financing package (comprising a £1.3 billion grant and £0.6 billion of borrowing from the Public Works Loan Board [PWLB]), and incremental borrowings of about £0.4 billion. Therefore we expect TfL's total borrowings for this fiscal year to reach £1.0 billion, with a further £1.3 billion in FY2022.
TfL's financial risk profile is constrained by its very high and rising debt burden. We expect total debt (including finance leases and operating leases) to reach £14.3 billion by FY2021; increasing further to £15.6 billion or 2x of total revenue by FY2022. A significant proportion of capital spending over this period is on large-scale projects that have strategic importance --both to
We now expect structurally lower EBITDA generation and higher debt service obligations will strain TfL's debt service coverage. We expect its debt service coverage ratios will deteriorate given its current and evolving revenue and expense positions. We forecast debt service coverage will fall below 1x in FY2022 and FY2023, from 1.5x in FY2020. Higher debt service obligations are a result of additional borrowing contracted to fund the COVID-19 revenue shortfall and Crossrail cost overruns.
TfL's weakening demand is counterbalanced by its dominant monopoly position in
We expect that beyond the COVID-19 pandemic, TfL will restore its strong financial flexibility with a farebox recovery ratio exceeding 70%, one of the highest of the mass transit systems we rate globally. TfL has shown its ability to cut costs by over-delivering on its savings program since 2016, when
We consider TfL to be a government-related entity. In our opinion, there is a very high likelihood that the
oTfL's very important role as a near monopoly providing essential transportation services in the
oThe very strong link between TfL and the
Due to strong extraordinary support from the
oHealth and safety.
We are lowering our short-term rating to 'A-1'. We believe TfL's liquidity will weaken compared with our previous base case, albeit remaining sound at about £1.2 billion. Cash to debt service will continue to decline and will dip below 1x on average beyond 2021, compared with 1.3x in FY2020. We anticipate that free cash to operating expenditure will decline further below 100 days over the forecast period.
Nevertheless, TfL's exceptional access to liquidity via the PWLB and capital market mitigates some of these risks, in our view. As a statutory body within the Debt Management Office, the PWLB lends to local authorities (including TfL) at short notice. In addition, TfL has a very strong track record of issuing own-name bonds on the capital markets. Hence, we do not view refinancing risk on TfL's commercial paper borrowings to be particularly high.
The negative outlook reflects our view that TfL's financial profile is stretched, at a time of heightened risk, resulting from the economic uncertainty caused by COVID-19-related social-distancing measures, and the delivery of large capital projects.
We could lower the rating if, over the next 24 months, we observed signs of weakening in the willingness and ability of the
We could revise the outlook to stable over the next 24 months if TfL managed to recover the demand for its services, including as a result of the Crossrail Elizabeth line opening, in line with our base-case scenario.
Related Criteria
oGeneral Criteria: Methodology For Linking Long-Term And Short-Term Ratings,
oGeneral Criteria: Rating Government-Related Entities: Methodology And Assumptions,
oCriteria | Governments | General: Mass Transit Enterprise Ratings: Methodology And Assumptions,
oGeneral Criteria: Methodology: Management And Governance Credit Factors For Corporate Entities,
oGeneral Criteria: Use Of CreditWatch And Outlooks,
oCOVID-19 Impact: Key Takeaways From Our Articles,
oUnited Kingdom 'AA/A-1+' Ratings Affirmed; Outlook Stable,
oCOVID-19: Emerging Market Local Governments And Non-Profit Public-Sector Entities Face Rising Financial Strains,
oGreater London Authority Ratings Affirmed At 'AA/A-1+'; Outlook Negative,
Bulletin:
oThe Coronavirus Pandemic Could Reduce Global Air Passengers By Up To 30% In 2020,
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