European Infrastructure Finance Yearbook - Investing In Bonds ...

Strengths, Concerns, And Mitigating Factors
STANDARD & POOR’S EUROPEAN INFRASTRUCTURE FINANCE YEARBOOK
TRANSPORTATION INFRASTRUCTURE
Strengths:
■ The business risk profile is considered “Satisfactory To Strong” (equating to a high ‘BBB’ to low
‘A’ category) based on long concession, high profitability, and strong free cash flow generation.
■ The management has a proven track record, with the successful implementation of significant
cost reductions and revenue-enhancing strategy based on market segmentation.
■ Eurotunnel has the exclusive concession to operate the only fixed transportation link between
the U.K. and France, which runs for another 80 years until 2086.
■ Strong operating margins: EBITDA margin for Eurotunnel has consistently been over 50%
since 1999.
■ There are limited capital expenditure requirements resulting in positive free cash flow.
Concerns:
■ The transaction is highly leveraged. The £2.9 billion of novated debt represents about 10.5x
2007 forecast EBITDA, increasing to £3.0 billion or 11x forecast EBITDA in 2013 due to
debt accretion.
■ The amortization holiday may enable distribution to shareholders in the initial years, subject
to a dividend lock-up trigger.
■ The transaction has a back-ended amortization profile with final maturity in 2050.
■ There is uncertainty regarding future competitive position over the medium to long term, due
to unpredictable behavior of competing transport modes between the U.K. and France.
■ There is exposure to demand risk from core shuttle services and, to some extent, railway
services, although the latter benefit from some government backing through guaranteed access
charges.
■ As there is no currency hedge, there might be a mismatch between funds available in
euro/sterling and the amount paid in the respective currency.
■ The ratings do not rely on enforcement of security, as the survivability of the issuer’s right of
substitution post-insolvency, and the practical implementation of this right, have never
been tested.
Mitigating factors:
■ The transaction’s high leverage is sustainable and should be considered in view of Eurotunnel’s
long concession and strong business position, and of a mortgage-style amortization profile to
alleviate refinance risk.
■ The total senior debt will fully amortize by 2050, two years ahead of the RUC term.
■ A payment test based on the synthetic debt-service coverage restricts distributions.
■ The substitution right, coupled with the security package (which includes the right for the
security trustee to appoint an administrative receiver in England), and provisions ensuring that
the issuer retains a blocking stake in creditors’ committees, should put the issuer in a favorable
position in restructuring negotiations.
■ The debt breakdown between British pound sterling- and euro-denominated loans aims to
replicate the revenue breakdown from the U.K. (in British pounds sterling) and from the
continent (in euros).
NOVEMBER 2007 ■ 69