European Infrastructure Finance Yearbook - Investing In Bonds ...

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TRANSPORTATION INFRASTRUCTURE 82 ■ NOVEMBER 2007 Credit And Cash Flow Evaluation Standard & Poor’s analysis focused on a stressed business plan and EBITDA levels from the management’s base case. The company’s case that was used for the debt restructuring was elaborated in 2005 on reasonable assumptions. Standard & Poor’s implemented a 20% haircut to the net present value (NPV) of the company’s net cash flow (NCF) (equivalent to 23% of the sum of revenues) on the life of the transaction. In this case, the business grows on average by a nominal 2.2% per year. Bearing in mind that Eurotunnel’s management case is already operating at a fairly low level, Standard & Poor’s estimates that the level of stress implemented is commensurate with a ‘BBB’ rating. Eurotunnel’s significant tax loss carry-forward allows all the pre-tax cash flow to be used for NCF DSCR (scheduled) STANDARD & POOR’S EUROPEAN INFRASTRUCTURE FINANCE YEARBOOK debt service in the first 10 years or so. NCF is used for the DSCR calculation. At the borrower level, under the management base case, the minimal scheduled NCF DSCR is at 1.48x (first year); it then improves, reflecting the expected volumes and cash flow growth. Under Standard & Poor’s stressed case, the ratio reaches a minimum of 1.36x in year six when principal amortization kicks off. This is a low but acceptable ratio for a concession with volume risk. That is above the 1.1x event of default covenant. The results from the cash flow analysis are shown in table 4. As a result of Standard & Poor’s cash flow analysis, £2.9 million (or 10.5x forecast EBITDA) is considered commensurate with a ‘BBB’ rating. Given the hybrid nature of the business, the Table 4 - Cash Flow Analysis Compared Outcomes Under Management And Standard & Poor’s Cases June 30, June 30, June 30, June 30, June 30, June 30, June 30, June 30, June 30, June 30, 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Management case (x) Standard & Poor’s 1.48 1.54 1.62 1.67 1.75 1.59 1.63 1.73 1.90 2.05 case (x) 1.47 1.44 1.46 1.49 1.53 1.36 1.40 1.44 1.48 1.53 Debt/(EBITDA-essential capex) Management case (x) Standard & Poor’s 12.53 12.11 11.54 11.18 10.72 10.28 10.01 9.41 8.52 7.89 case (x) 12.64 12.90 12.81 12.53 12.27 11.95 11.58 11.22 10.87 10.52 Synthetic DSCR (NCF/(Higher of actual and synthetic DS)) Management case (x) Standard & Poor’s 1.33 1.37 1.45 1.50 1.56 1.59 1.63 1.73 1.90 2.05 case (x) NCF ICR Management 1.31 1.29 1.30 1.33 1.36 1.36 1.40 1.44 1.48 1.53 case (x) Standard & Poor’s 1.48 1.54 1.62 1.67 1.75 1.82 1.88 2.01 2.23 2.42 case (x) (FFO + interest)/interest Management 1.47 1.44 1.46 1.49 1.53 1.56 1.62 1.68 1.74 1.80 case (x) Standard & Poor’s 1.75 1.80 1.92 1.99 2.00 2.07 2.17 2.28 2.42 2.58 case (x) FFO/Net debt Management 1.72 1.70 1.68 1.70 1.72 1.76 1.82 1.88 1.95 2.02 case (%) Standard & Poor’s 9.2 9.4 10.0 10.4 10.4 10.8 11.3 11.9 12.5 13.3 case (%) 9.1 8.9 8.8 8.9 9.0 9.2 9.5 9.8 10.1 10.4
length of the concession, and its bi-national economics, it is impossible to find a suitable peer to Eurotunnel. Accounting Issues Since December 2005, Eurotunnel Group’s financial statements have been prepared in accordance with IFRS. Going concern The auditors and Commissaires aux Comptes have reported on the 2006 accounts. Their report contained matters of emphasis relating to going concern, the valuation of property, plant, and equipment, the consequences of the implementation of the safeguard plan on the accounts, and the nonapproval of the 2005 accounts. Treatment of the accounts on a going concern basis depends on the full implementation of the safeguard plan, which seems increasingly likely now that the exchange tender offer has been successful, with 93% of the share capital finally tendered. Going concern involved, notably, the drawing of the term loan (this has now been successfully implemented), and the failure of any legal action aimed at blocking the safeguard plan (all recourses seem to have been rejected). If all of the elements of the safeguard plan are not put into place, Eurotunnel’s ability to trade as a going concern would not be assured. The accounts would be subject to certain adjustments, whose amounts cannot be measured at present. The adjustments would relate to the impairment of assets to their net realizable value, the recognition of liabilities, and the classification of noncurrent assets and liabilities as current assets and liabilities. The asset value on liquidation has been estimated at £890 million by the valuer/auctioneer appointed by the safeguard procedure. Impairment of property, plant, and equipment Since 2003, the group has applied IAS 36 methodology, which requires the net book value of assets to be compared with discounted future operating cash flows. The application of this standard at Dec. 31, 2005 gave rise to a value in use £1.75 billion lower than the net book value of the assets, and led to an impairment charge for this amount in the 2005 accounts. Impairment charges for £1.3 billion and £395.0 million were already made in the 2003 and 2004 accounts. STANDARD & POOR’S EUROPEAN INFRASTRUCTURE FINANCE YEARBOOK TRANSPORTATION INFRASTRUCTURE The recognition of impairment charges at Dec 31, 2005 caused Eurotunnel’s main companies to have negative total equity. Under the safeguard plan, these companies’ equity was reconstituted through debt capitalization after the tender offer. In 2006, Eurotunnel did not make any impairment charge. The depreciation charge decreased by 21% in 2006 following the impairment charge in 2005. Recovery Rating Analysis Standard & Poor’s assigned a recovery rating of ‘2’ to the €2.84 billion senior secured loans. This indicates Standard & Poor’s expectation of substantial (70% to 90%) recovery of principal in the event of a payment default. Approach For the loan recovery estimate, Standard & Poor’s combined an NPV approach (akin to project finance transactions) with a debt multiple approach (as for corporates), reflecting the hybrid nature of Eurotunnel. Standard & Poor’s used an enterprise valuation based on going concern because it considers that greater value will remain in the business if it is reorganized rather than liquidated. Based on the live example of Eurotunnel’s debt negotiations and financial restructuring between 2005 and 2007, Standard & Poor’s assumes that an event of default at the borrower level would be followed by a successful negotiation with the creditors, leading to a consensual debt restructuring instead of a substitution. The new debt structure is becoming much simpler, favoring a consensual restructuring. Payment default scenario Standard & Poor’s simulated payment default assumes a severe traffic shock in 2013, leading to a borrower’s default at the time of the first principal payment that year. In 2013, the borrower’s total debt service will be about £182 million; NCF needs to fall to £200 million for an event of default on the term loan. Assuming £15 million of saving could be made on capital and operating expenditures, the event of default requires EBITDA to fall to approximately £225 million (a 20% fall under Standard & Poor’s scenario, which is already stressing the management’s case). Following the event of default at the borrower’s NOVEMBER 2007 ■ 83
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November 2007 Infrastructure Financ
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CONTENTS Introduction STANDARD & PO
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INTRODUCTION 2007: New Challenges A
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ject Finance Rating Distribution: I
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COMMENTARY Publication Date: Sept.
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(Bil. ) 140 120 100 80 60 40 20 0 F
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UTILITIES EUROPEAN UTILITIES Once a
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UTILITIES approach to ownership unb
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UTILITIES 16 ■ NOVEMBER 2007 tran
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UTILITIES 18 ■ NOVEMBER 2007 Limi
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UTILITIES 20 ■ NOVEMBER 2007 •
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Publication Date: osenergoatom (sta
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UTILITIES 24 ■ NOVEMBER 2007 Tabl
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UTILITIES 26 ■ NOVEMBER 2007 supp
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UTILITIES 28 ■ NOVEMBER 2007 pres
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UTILITIES 30 ■ NOVEMBER 2007 Tabl
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Page 42 and 43: UTILITIES Publication Date: Aug. 29
Page 44 and 45: UTILITIES Publication Date: Nov. 12
Page 46 and 47: UTILITIES Publication Date: Sept. 3
Page 48 and 49: UTILITIES Publication Date: Aug. 17
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Page 56 and 57: TRANSPORTATION INFRASTRUCTURE 54
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PROJECT FINANCE/PUBLIC-PRIVATE PART
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RATINGS LIST RATINGS LIST Utilities
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RATINGS LIST Transportation Infrast
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RATINGS LIST Project Finance Name I
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CONTACTS KEY ANALYTICAL CONTACTS Fr
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ARGENTINA AUSTRALIA BRAZIL CANADA C
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