oTravel restrictions on both sides of the Channel Tunnel are persisting amid concerns over delays in the rollout of vaccines on the continent. We have therefore revised our traffic assumptions to defer the recovery in cross-border passenger travels to second-half 2021.
oWe expect 2021 revenue for Eurotunnel's owner, Getlink SE, to remain at about 75% of 2019 levels, and recover more meaningfully in 2022, to about 100% of pre-pandemic levels. As a result, we forecast that Getlink's weighted-average funds from operations (FFO) to senior debt in line with our previous expectations of above 5% over 2021-2023.
oGetlink should preserve sufficient liquidity throughout 2021, supported by the limited debt service obligations and dividend payments to shareholder in this horizon.
oWe are therefore affirming our 'BB-' long-term issuer credit and issue ratings on Getlink and its debt; our '4' recovery rating on the debt is unchanged.
oThe negative outlook reflects continued risks to our forecasts due to uncertainty around the opening of the border between France and the U.K., and the pace of traffic recovery.
MADRID (S&P Global Ratings) --S&P Global Ratings today took the rating actions listed above.
The travel restrictions and customs arrangements following the trade agreement should defer Eurotunnel's revenue recovery until 2023.
We have revised downward our assumptions of rail passengers at Eurotunnel in 2021. We now expect Eurotunnel will see only about 25% of 2019 passengers' levels in 2021 (compared with our forecast of 70% in October 2020), rising to about 75% in 2022 and a slow recovery with some permanent volume loss in the following years. Recovery should depend on both the U.K. and France opening their borders, and travellers' confidence being restored in both travel in confined spaces and the cessation of unexpected travel restrictions. Given the holdups in the vaccine rollout, the resumption of international travel could be further delayed. Traffic resurgence might also be too late to take advantage of summer holidays, when the demand for travel is usually highest. Rail revenue recovery path is supported by the fixed component under the rail usage contract (about 30% of the total) returning to 2019 levels by 2024. For shuttle service, truck volume was resilient in 2020; however, 2021 volumes are likely to remain 15% below 2019 levels, affected by new cross-border arrangements related to COVID-19 and more border checks due to the trade agreement between U.K. and EU that took effect Jan. 1. Additional checks for cross-border freight transportation ensure compliance with each countries' rules. Increased paperwork and new cross-border protocols resulted in longer lead times at crossings and reduced truck traffic during the early months of 2021. For cars, although we see weaker volumes in 2021 than our previous expectation, as vaccination becomes widely available and restrictions ease in the second half of 2021, demand could pick up faster than other services, as people might prefer personal vehicles to travel for health reasons. As a result, we expect shuttle revenue to recover to 2019 levels by 2022.
The competitive position and pricing strategy should affect the recovery trajectory as volumes gradually return to normal.
Overall, our expectation of recovery considers Eurotunnel's strategic location, with traffic levels likely to return to historical ones, although at different times for each service. We also consider other components to drive the recovery path for each service, such as the implication of Brexit, competition with air traffic providing an alternative to high-speed rail services between London and Paris, Brussels, and Amsterdam, and with ferry operators for the transportation of passengers and trucks across the Channel, which are likely to affect yields post-COVID-19. For shuttle services, the increased yields in 2021, similarly to 2020 due to the dynamic pricing policy, is a partial factor in our expectation of revenue recovery, because we don't assume this yield level to persist. For 2022 onward, we assume yields returning to historical levels, adjusted for inflation, and some premium on yield management.
Credit metrics should remain tight for the rating in 2021 but recover to levels commensurate with the rating starting in 2022.
Assuming our traffic assumptions and yield assumptions, we expect weighted-average FFO to senior debt close to 6% over 2021-2023. We also assume capital expenditure (capex) in 2021 should remain high--around EUR200 million--despite some postponement in Eurotunnel, because we expected works to be completed in ElecLink this year. Capex for the following years should be mainly for Eurotunnel. For 2021, we assume the distribution of dividends approved in the general meeting; distributions should return to close to 100% of free operating cash flow, following the recovery trajectory. Our forecast also reflects some deferred investment costs in Eurotunnel, reflecting the lower volumes in this horizon, and start of operations at ElecLink in 2022, whose revenue we estimate should represent about 10% of the group's total once ElecLink is fully operational.
The cash position at the Getlink level should provide a cushion against the risk of continued interruption in dividend flow.
Being the ultimate parent, discretionary cash flow from the Eurotunnel might not be available to Getlink due to distribution restrictions, notably if Eurotunnel's 12-month rolling backward-looking debt service coverage ratio (DSCR) drops below 1.25x. In 2020, despite the reported ratio of 1.45x, Eurotunnel did not pay dividends to Getlink due to the group's decision to preserve liquidity at the subsidiary. In our base-case scenario for Channel Link Enterprises Finance PLC (CLEF), the risk of distribution lockup at Eurotunnel on the testing date (Dec. 31, 2020) remains as the pace of recovery is uncertain and cash preservation measures are likely to continue at the subsidiary. We expect a DSCR of 1.25x in December 2021. We also expect Eurostar to continue operating trains; and although it is not our base-case scenario, any disruption to Eurostar's operation could weigh on CLEF's path to recover. If Eurostar were unable to continue operations, Eurotunnel could see a reduction in a variable component of the rail usage payment during the period of potential service disruption as no passengers would be able to cross the tunnel. We expect that in this situation any period of disruption would be limited and another operator would step in to provide services. (for more information, see " Outlook On Channel Link Enterprises Finance Remains Negative On Delayed Traffic Recovery; Ratings Affirmed," published May X, 2021, on RatingsDirect). Nevertheless, given that, as of March 31, 2021, Getlink held about EUR240 million in cash and EUR10 million in subsidiaries other than Eurotunnel, we expect it should service its cash needs. These include about EUR20 million-EUR30 million annual operating expense; EUR25 million annual interest due on the EUR700 million bond maturing in 2025; and EUR140 million in capex to complete ElecLink.
S&P Global Ratings believes there remains high, albeit moderating, uncertainty about the evolution of the coronavirus pandemic and its economic effects.
Vaccine production is ramping up and rollouts are gathering pace around the world. Widespread immunization, which will help pave the way for a return to more normal levels of social and economic activity, looks to be achievable by most developed economies by the end of the third quarter. However, some emerging markets may only be able to achieve widespread immunization by year-end or later. We use these assumptions about vaccine timing 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.
The negative outlook reflects the uncertainty related to when the border between the U.K. and France will reopen and the path to recovery for international travel. We could lower the rating if traffic recovery in Eurotunnel were further delayed by the extension of travel restrictions, preventing the company from maintaining its weighted-average FFO to debt to 5% in the second half of the year. Changes to government policies for international travels, a lesser propensity to travel, in particular by business travellers, or harsher macroeconomic conditions could increase downside rating pressure. These conditions could result in a prolonged disruption of dividends from Eurotunnel to Getlink, weakening Getlink's liquidity position, or in deteriorating consolidated financial ratios.
We could lower the rating on Getlink if:
oVolumes of cross-border car and passenger travel remain subdued in second-half 2021 consistent with the first quarter, if there are further travel restrictions because of new COVID-19 variants, or traffic disruption due to Eurostar's inability to provide services;
oPersistent headwinds from post-Brexit operational risks and increased competition in the trucks segment put pressure on the Eurotunnel's revenue;
oThere is a prolonged disruption of dividends from Eurotunnel to Getlink;
oElecLink delays completing construction or encounters a material cost overrun; and
oGetlink burns more cash that we expect, leading to an increase in leverage or weaker liquidity position.
These scenarios would stress cash resources at Getlink, and could result in weighted-average S&P Global Ratings-adjusted FFO to debt deteriorating to below 5% in 2021-2023.
We could revise the outlook to stable if we see sustained improvement in traffic volumes supported by the reduction in pandemic-related restrictions and recovery in economic situation. We would also expect to see stable cross-border freight operations under the new post-Brexit rules before we revise the outlook to stable. We would consider increasing the rating if traffic and operating performance support our forecasts that Getlink's weighted-average FFO to debt will stay above 6% in 2021-2023.
Related Criteria
oGeneral Criteria: Group Rating Methodology, July 1, 2019
oCriteria | Corporates | General: Corporate Methodology: Ratios And Adjustments, April 1, 2019
oCriteria | Corporates | General: Recovery Rating Criteria For Speculative-Grade Corporate Issuers, Dec. 7, 2016
oCriteria | Corporates | Recovery: Methodology: Jurisdiction Ranking Assessments, Jan. 20, 2016
oCriteria | Corporates | General: Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Dec. 16, 2014
oGeneral Criteria: Country Risk Assessment Methodology And Assumptions, Nov. 19, 2013
oCriteria | Corporates | General: Corporate Methodology, Nov. 19, 2013
oGeneral Criteria: Methodology: Industry Risk, Nov. 19, 2013
oGeneral Criteria: Methodology: Management And Governance Credit Factors For Corporate Entities, Nov. 13, 2012
oGeneral Criteria: Principles Of Credit Ratings, Feb. 16, 2011
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