o A more severe drop in Eurostar passengers in the Eurotunnel connecting France and the U.K. (the Fixed Link) combined with uncertainties over the pace of traffic recovery has led us to revise our traffic and yield assumptions for Channel Link Enterprises Finance PLC (CLEF).
o We now expect traffic disruption, although partly offset by higher yields from cars and trucks, to result in a deterioration of our annual debt service coverage ratio (ADSCR) forecast to 1.10x in December 2020, from 1.20x previously expected.
o We have therefore lowered our long-term ratings on the unguaranteed class 'A' notes (A1, A2, A5, A6, A7, A8, A9, and A10), the class 'G' notes (G1, G2, G4, and G5), and the liquidity notes issued by CLEF by one notch to 'BBB' from 'BBB+'.
o We have also lowered the S&P Underlying Rating (SPUR) on CLEF's G3 and G6 notes to 'BBB' from 'BBB+' while affirming the 'AA' long-term rating, with a stable outlook, reflecting our rating on Assured Guaranty (Europe) PLC (AGE).
o The negative outlook on the issue ratings reflects the uncertain pace, timing, and shape of the traffic recovery through the Eurotunnel due to COVID-19 restrictions and potential effects from any operational disruption related to the U.K.'s exit from the EU (Brexit).
MADRID (S&P Global Ratings) -- S&P Global Ratings today took the rating actions listed above.
In 2007, CLEF issued a combination of £1.8 billion and EUR2.2 billion of notes due December 2050 as part of the financial restructuring and debt refinancing of Getlink (previously known as Groupe Eurotunnel SA). Getlink is the ultimate parent of France Manche SA (FM) and Channel Tunnel Group Ltd. (CTG) (together, Eurotunnel). The two concessionaires operate the undersea tunnel between the U. K. and France, under a concession agreement granted in 1986 by the two governments and expiring in 2086.
CLEF on-lent the proceeds of the issuances to the two concessionaires (the borrowers) under a facility agreement and therefore relies on the concessionaires' payments to service its interest and principal repayment. The concessionaires' payment obligations are secured primarily by their property, undertaking, and assets. Under the concession, FM and CTG have the right and obligation, jointly and severally, to design, finance, and construct the Fixed Link and operate it until 2086 at their own risk, without any government funds or state guarantees. We therefore consider the concessionaires'--and, in turn, CLEF's--ability to service their debt as exposed to market risk and particularly to fluctuations in traffic.
The Fixed Link is 50 kilometers long and comprises two single-track rail tunnels, plus a third service tunnel for maintenance and evacuation. It has been in operations since opening to traffic in 1994. Traffic includes shuttle services for tracks, cars, and coaches, and rail services for passengers and freight.
o Strong competitive position due to an exclusive concession to operate the only fixed transportation link between the U.K. and France for another 66 years until 2086.
o High profitability levels reflecting concessionaires' ability and track record to increase yields at a rate exceeding retail price index (RPI) growth, exploiting the asset's strong competitive position and the price inelasticity of demand.
o Resilient operating history due to sizable cost savings and a revenue-enhancing strategy based on market segmentation.
o Project exposure to traffic risk, which can drive fluctuations in cash flow available to debt service (CFADS), for example spurred by COVID-19-related mobility restrictions and potential Brexit-related disruptions.
o Competition with ferry operators for the transportation of passengers and trucks across the Channel, while air traffic provides an alternative to high-speed rail services between London and Paris, Brussels, and Amsterdam.
o Relatively back-ended amortization schedule and no currency hedge in place.
Cross border rail traffic has been more severely hit than we previously anticipated, on the back of mobility restrictions, quarantine measures, and fewer business passengers.
We also anticipate that the risks of renewed but localized lockdowns, affecting general mobility, and requirements to self-isolate after crossing borders from countries with high infection rates, could lead to a slower recovery of cross-border traffic than previously assumed. As such we have revised our assumption on Eurostar's passengers, and we now consider that they could drop by 75% in 2020, compared with 40% previously. We now also expect passenger traffic will remain 35%-40% below pre-pandemic levels next year. As a result, we estimate that the project's ADSCR could fall to 1.10x in December 2020 from the 1.20x we previously expected. That said, during the pandemic truck traffic have shown resilience, and people have shown a preference for personal vehicles for health reasons. Therefore, we continue to assume in our base-case scenario that car and truck volumes will likely decline by 35% and 15%, respectively, in 2020 compared with 2019. Furthermore, we positively note that the concessionaires were able to partly offset the drop in traffic by increasing yields on the shuttle, helped by their dynamic pricing policy. Our forecasts also reflect that about 30% of total rail revenue is not exposed to traffic risk because the concessionaires are entitled to receive fixed payments under the rail usage contract, regardless of the number of trains run and passengers carried.
The severe drop in the minimum ratio could trigger an event of default if it falls below 1.10x, under the terms of the financial documentation.
Nevertheless, we understand that the controlling creditor AGE has granted a waiver for the calculation of the financial covenant over the next three calculation dates (December 2020, June 2021, and December 2021). Hence, we do not see a risk of an acceleration of the debt materializing, triggered by the unprecedented traffic drop in the Eurotunnel. Nevertheless, we expect the project to be in lock-up in December 2020, meaning that the ADSCR below 1.25x would inhibit any distributions to the ultimate parent Getlink. Should the ADSCR remain below 1.25x for more than three consecutive periods--which we do not anticipate at this stage--the concessionaires would need to apply the cash trapped to prepay the outstanding debt to CLEF. In turn, the issuer will reimburse the outstanding notes on a pro-rata basis.
Despite the expected deterioration in the ADSCR at year-end 2020, Eurotunnel has sufficient cash on hand (about EUR359 million) to repay the debt service due in December 2020 (about EUR112 million).
This reflects Eurotunnel's financial policy of voluntarily retaining about one year's debt's service. Hence, despite not being in lock-up in June 2020 as the 12 months backward looking ADSCR was well above 1.25x, no distributions were made to its ultimate parent Getlink. Overall, we expect that CLEF will be able to fully service its debt in December 2020 out of its operating cash flows and without resorting to available liquidity sources. These include the proceeds from the £152 million and EUR96 million liquidity notes issued by CLEF in 2007, along with £23 million and EUR64 million guaranteed facilities provided to the borrowers by Assured Guarantee Municipal Corp. (AGM) and AGE. This corresponds in total to about 18 months of debt service.
Given the limited room for cost savings, traffic recovery remains key in maintaining the rating amid looming Brexit uncertainties.
There is lingering uncertainty about what a recovery in traffic will look like. In the first nine months of the year, car and truck volumes in the tunnel were down 43% and 13%, respectively, against the same period in 2019, and in our base-case scenario we assume a substantial traffic recovery in 2021. Given the Eurotunnel's strategic location, we assume the unprecedented traffic drop will be only temporary and expect it will likely be able to restore its solid traffic track record more quickly than other infrastructure assets. As such, we expect the ADSCR to recover to about 1.3x in 2021, supported by a gradual rebound in traffic, and we continue to forecast ratios will remain materially higher throughout the life of the project. Nevertheless, travel restrictions and continuous social-distancing policies, combined with reduced business trips, could hinder traffic recovery, particularly until a vaccine is widely available, which we expect around mid-year 2021. Weaker-than-expected revenue could also stem from Brexit-related uncertainty and general macroeconomic conditions, which could lead to less discretionary consumer spending. Trucks and rail freight could be slowed by a regime that operates more border checks and imposes tariffs that did not apply before. Terminals could be subject to delays if insufficient sites are designated as railway customs areas available for customs/security checks for a diverse range of products.
S&P Global Ratings acknowledges a high degree of uncertainty about the evolution of the coronavirus pandemic.
The current consensus among health experts is that COVID-19 will remain a threat until a vaccine or effective treatment becomes widely available, which could be around mid-year 2021. We are using this assumption in assessing the economic and credit implications associated with the pandemic (see our research here: www.spglobal.com/ratings). As the situation evolves, we will update our assumptions and estimates accordingly.
Environmental, social, and governance (ESG) credit factors for this credit rating change:
o Health and safety
The negative outlook reflects the uncertain pace, timing, and shape of traffic recovery through the Eurotunnel. This could occur because of more localized lockdowns due to higher cases of COVID-19 in France and the U.K., Brexit-related operational disruption, constraints to passengers' mobility, or if the recession is harsher or longer than expected.
We could lower the issue ratings and the SPUR by one notch if the project's financial metrics do not substantially improve in 2021, on the back of our anticipated traffic recovery.
This could result from significantly weaker Eurostar passenger numbers than we currently forecast, or a prolonged decline in shuttle volumes, not adequately compensated by a yield increase. A downgrade could also result from operational disruption due to Brexit, which could further hinder an uncertain traffic recovery.
We may lower the rating if our base-case minimum ADSCR does not improve in 2021, trending toward 1.20x.
We could revise the outlook to stable if COVID-19-related traffic disruption is contained, the risk from the pandemic decreases, traffic recovers strongly, and the economic situation stabilizes, including visibility over rules governing travel and trade arrangements after Brexit.
If these conditions are met, we would consider raising the rating should traffic and operating performance support a minimum ADSCR solidly above 1.30x in our base case.
o Criteria | Structured Finance | General: Counterparty Risk Framework: Methodology And Assumptions, March 8, 2019
o General Criteria: Guarantee Criteria, Oct. 21, 2016
o Criteria | Corporates | Project Finance: Project Finance Operations Methodology, Sept. 16, 2014
o Criteria | Corporates | Project Finance: Project Finance Framework Methodology, Sept. 16, 2014
o Criteria | Corporates | Project Finance: Key Credit Factors For Road, Bridge, And Tunnel Project Financings, Sept. 16, 2014
o Criteria | Corporates | Project Finance: Project Finance Transaction Structure Methodology, Sept. 16, 2014
o General Criteria: Country Risk Assessment Methodology And Assumptions, Nov. 19, 2013
o Criteria | Corporates | Project Finance: Project Finance Construction And Operations Counterparty Methodology, Dec. 20, 2011
o General Criteria: Principles Of Credit Ratings, Feb. 16, 2011
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