S&P GLOBAL, INC. oWe expect rail passenger revenues to decline by about 30% for Belgian train operator Société Nationale des Chemins de Fer Belges (SNCB) in 2020, followed by a two-to-three year recovery.
oThe new government has approved the payment of
oSNCB's high leverage (14x at
oWe are therefore affirming our 'A/A-1' long- and short-term ratings on SNCB and our 'A' rating on its senior unsecured debt.
oThe stable outlook indicates that we expect the Belgian government to continue providing prompt extraordinary support to SNCB if needed to absorb the effects of COVID-19-related traffic declines on its cash flows over the next few years.
The new government's approved support of
SNCB has already received
Despite uncertainty about pandemic-related support for 2021 onward, we believe the Belgian government will provide additional extraordinary subsidies to largely absorb the impact of COVID-19-related traffic declines on the company's cash flows over the next few years. In our view, this will ensure that SNCB can continue operating with at least free operating cash flows (FOCF) largely in equilibrium, while maintaining its net debt below 2014 levels as required by the government (
We expect SNCB's financial leverage to remain high although future financial metrics will depend on the scale of government support and the company's success in delivering operating efficiencies.
Our 'b' stand-alone credit profile (SACP) on SNCB continues to reflect its high legacy debt (about
The company has improved over the last few years with
Pending the approval of a multi-annual management contract, there is limited visibility about the future level of annual operating subsidies for SNCB. The government has reduced it to about
We include in our ratios a
We expect passenger traffic to remain below pre-pandemic levels in 2021 and 2022 and the recovery to be even longer for cross-border traffic.
We expect domestic passenger revenues to decline by about 30% in 2020, supported by proceeds from seasonal tickets mitigating the impact of actual traffic decline and increased load factors in September and beginning of October. Nevertheless, we expect traffic to remain at about 20% and 10% below pre-pandemic levels in 2021 and 2022, in line with our views on the sector as a whole (see "European Rail Operators Are On A Slow Train To Recovery," published
We anticipate cross-border traffic (about 10% of SNCB passenger revenues) could take longer to recover and could be affected just as much as aviation due to quarantine measures and a general preference for cars for short leisure trips. This was confirmed by a steeper decline in international revenues in the first half of 2020 (down 50% compared to 2019) than domestic passenger revenues (down 30%).
SNCB's profitability remains weaker than peers' but this is mitigated by large government subsidies and our view that the company will maintain its monopolistic position at least until 2033.
The company relies heavily on operating subsidies received by the government. Excluding extraordinary support related to the pandemic, these account for about 50% of total revenues. That said, profitability remains limited with 5%-7%
SNCB's self-funded capital expenditure (capex) is minimal, however, at about
We also expect SNCB to retain its monopolistic position at least until 2033. In other words, we anticipate the start of competition for commercial rail passengers to be delayed in
The stable outlook reflects our expectation of an extremely high likelihood of extraordinary support from the Belgian government to state-owned railway operator SNCB. We expect the government to mitigate the effects of pandemic-related revenue declines with commensurate extraordinary support. We also think SNCB will maintain adequate liquidity based on access to capital markets and banks, and debt funding from
We could revise the SACP by one notch to 'b-' if the company generates a material cash flow deficit or cannot maintain net debt below 2014 levels as required by the government--this could occur if pandemic-related disruptions were not sufficiently mitigated by state support. This would not change the rating, however, all else remaining equal.
We could lower the rating by multiple notches if we believed that SNCB's link with or role for the state had weakened. This could materialize if the extent and mechanism of state support were not aligned with our view of an extremely high likelihood of support.
We could also downgrade SNCB by multiple notches if we were to revise its SACP by two notches to 'ccc+', which we see as unlikely given its access to liquidity and our view of an extremely high likelihood of support.
We could raise the rating if growth in passenger numbers, combined with strong cost management, results in sustainable positive cash flows and leads to debt reduction, with debt to EBITDA falling below 6x. At SNCB's current debt levels, we would consider an upgrade only if we raised the sovereign rating on
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