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Rating Action:

Moody's assigns Baa2 ratings to Porterbrook Rail Finance Limited's Senior Debt; stable outlook

25 Jun 2018

London, 25 June 2018 -- Moody's Investors Service ("Moody's") has today assigned Baa2 guaranteed ratings to the GBP250 million senior secured bonds due in 2019, the GBP250 million senior secured bonds due 2020, the GBP270 million senior secured bonds due 2026, and the GBP250 million senior secured bonds due 2029 (the Senior Bonds) issued by Porterbrook Rail Finance Limited (the Issuer). At the same time Moody's assigned Baa2 ratings to the GBP100 million Series A senior secured notes due 2028, the GBP100 million Series B senior secured notes due 2028, the GBP100 million Series C senior secured notes due 2031, the backed GBP250 million senior secured loan maturing in 2036, the GBP285 million senior secured term loan A1 maturing in 2022, the GBP100 million senior secured term loan A2 maturing in 2028 and the GBP500 million senior secured revolving bank facility maturing in 2023 (the Senior Loans, and together with the Senior Bonds,the Senior Debt) raised by the Issuer. Moody's also assigned a provisional (P)Baa2 backed rating to the Issuer's GBP3 billion medium-term note programme. The outlook is stable.

The Issuer and its subsidiaries form Porterbrook, one of the three principal UK rail rolling stock leasing companies. The group enters into long-term leases to supply passenger rolling stock to train operating companies (TOCs) and locomotives and wagons to freight operating companies (FOCs), and may also provide rolling stock lifecycle maintenance and asset management services. The group also leases certain station equipment.

RATINGS RATIONALE

The Baa2 Senior Debt ratings reflect as positives 1) the stable and predictable nature of Porterbrook's passenger train leasing revenues, 2) limited operational risk, 3) a track record of stable oversight and support from the UK Department for Transport (DfT), albeit tempered by recent franchising developments, 4) a strong long-term passenger growth outlook and 5) the creditor protective features of Porterbrook's ring-fenced financing structure. At the same time, the ratings are constrained by 1) exposure to train re-leasing risk, 2) fleet concentration, 3) refinancing risk and 4) high leverage.

Demand for passenger rail services in the UK has grown strongly since privatisation and, notwithstanding some recently reported data, the industry expects it to continue to do so. The UK government, through the DfT, has historically supported this growth with consistent regulation and oversight, particularly via the franchising process. Recent franchise awards have included the procurement of new trains, which will result in the displacement of a significant numbers of trains that have not reached the end of their expected useful life, a negative development for the incumbent ROSCOs.

According to the Office of Road and Rail (ORR), total passenger kilometres travelled on franchised routes grew to 65.8 billion in 2017, from 28.8 billion in 1994, an average annual growth rate of 3.7%. The UK passenger rolling stock fleet has not kept pace. The fleet totalled just under 13,400 in March 2017, an increase of just over 20% from the circa. 11,000 vehicles in operation at privatisation. The average fleet age has also increased, to 21 years in 2017 from 15 years in 2007.

The arrival of new Thameslink trains, combined with major delays to Network Rail's electrification programme, has long been expected to generate a temporary oversupply of electric multiple units (EMUs) in the rail system. The DfT's recent franchising preference for new build trains will add to this oversupply. And new train build costs are currently very low. 'In the medium term, Moody's expects that Porterbrook will face significant competition from 1) trains displaced from other franchises and/or 2) new build solutions, especially for EMU fleets' says Tomás O'Loughlin, a Moody's Vice President - Senior Credit Officer and lead analyst for Porterbrook Rail Finance Limited.

He notes that 'Moody's base case assumptions for Porterbrook incorporate conservative assumptions regarding 1) forecast re-leasing rates and 2) the group's ability to cascade fleets that will be displaced in the next few years'.

Porterbrook has been less active in procuring new rolling stock in recent years, which has resulted in relatively lower financial leverage than peers. Further, senior debtholders benefit from financing protections that include financial metric distribution lock-up and default tests, security over rolling stock and other key assets and restrictions on business activities and indebtedness. However, 68% of Porterbrook's Senior Debt has bullet maturities and the Senior Debt has a relatively short weighted average tenor of 6.7 years. While these maturities are well spread and should be manageable, the group is exposed to the risk that debt service costs may be higher post refinancing. We note, positively, management's intention to refinance upcoming bond bullet maturities with longer term amortising debt.

Notwithstanding the bullet maturity nature of much of Porterbrook's Senior Debt, the group's liquidity position is good. In June 2018, the Issuer signed a new GBP500 million revolving bank facility, which will expire in June 2023 if extension options are not utilised.

RATIONALE FOR STABLE OUTLOOK

The outlook is stable, reflecting Moody's expectation of strong cashflow generation supported by rolling stock lease rates that are, at a minimum, in line with our base case forecast and that Porterbrook will continue to employ conservative financial policies. The stable outlook also reflects Moody's expectation of continued stable and supportive regulation of the UK passenger rail sector.

WHAT COULD CHANGE THE RATINGS UP/DOWN

Moody's could upgrade the ratings if 1) refinancing risk were reduced and 2) the rating agency forecast a net debt to EBITDA ratio below 4.5x on a sustained basis.

Downward rating pressure would result from 1) a Moody's expectation, resulting from aggressive financial policies or poor financial performance, that the net debt to EBITDA ratio would be higher than 6.5x on a sustained basis or 2) a weakening in Moody's assumption of stable and supportive regulation and oversight of the UK passenger rail sector.

The principal methodology used in these ratings was Generic Project Finance published in April 2018. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Tomas O'Loughlin
VP - Senior Credit Officer
Infrastructure Finance Group
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Kevin Maddick
Associate Managing Director
Infrastructure Finance Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Releasing Office:
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

No Related Data.
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