o A more severe drop in Eurostar passengers in the
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
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
o The negative outlook on the issue ratings reflects the uncertain pace, timing, and shape of the traffic recovery through the
In 2007, CLEF issued a combination of £1.8 billion and
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.
STRENGTHS
o Strong competitive position due to an exclusive concession to operate the only fixed transportation link between the
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.
RISKS
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
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
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 (
Despite the expected deterioration in the ADSCR at year-end 2020,
This reflects
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
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
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.
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o General Criteria: Principles Of Credit Ratings,
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