Moody's Aug 30th 2017
Reliance Rail Finance Pty Ltd
Update to credit analysis
Summary
Reliance Rail's credit profile is underpinned by its predictable operating cashflows, because
they are derived from availability-based service payments from the highly rated State of
New South Wales (Aaa stable), which are not subject to passenger volume risk. We expect
Reliance Rail to continue its solid reliability track record over the remaining term of the
project, a further source of support for its credit profile.
The project's credit profile is constrained by its material refinancing tasks over next 15
months, when around AUD1.15 billion of the project's senior secured bank facilities and bonds
mature. Key uncertainties are the project’s ability to manage increased interest costs as the
existing low-cost debt is refinanced at materially higher prevailing rates, and the extent of
market appetite for such debt amounts for a single project.
Refinance risk is partially mitigated by Reliance Rail's plans to reduce debt as part of the
refinancing.
In the unlikely event of a termination due to a Reliance Rail default, we expect a high
recovery based on the Project's termination payment regime.
Credit Strengths
» Availability-based revenue stream underpins cashflow predictability
» Solid operating track record
Credit Challenges
» Uncertainty associated with company's material refinancing task in late 2018
Rating Outlook
The stable outlook reflects our expectation of continued low cash flow volatility and stability
in operations.
Factors that Could Lead to an Upgrade
RRF's ratings are unlikely to be further upgraded in the absence of substantial progress being
made on refinancing.
Factors that Could Lead to a Downgrade
RRF's ratings could experience downward pressure if: (1) the operating performance of the
fleet deteriorates substantially from current levels, or (2) Moody's believes that refinancing
risk is increasing, which could arise from a material deterioration in capital market conditions.
Corporate Profile
Reliance Rail was appointed by Sydney Trains (formerly RailCorp) to deliver the NSW Rolling Stock public private partnership in 2006.
Reliance Rail Finance Pty Ltd (”Issuer” or “RRF”) is the funding vehicle for Reliance Rail.
As part of the Rolling Stock project, Reliance Rail designed and manufactured 78 eight-car Waratah train-sets for the Sydney suburban
rail network, a maintenance facility at Auburn, and two training simulators for Sydney Trains. The final train-set achieved practical
completion in May 2014.
The project's primary responsibility during the operating phase ending in 2044 is to ensure that at least 72 trains are available for
service on a daily basis. Additionally, Reliance Rail is also responsible for cleaning, repair, maintenance and refurbishment of the fleet,
train simulators and the maintenance facility.
To fund the manufacturing and construction activities, Reliance Rail Finance raised AUD357 million of senior secured bank facilities,
AUD1.8 billion of senior secured bonds and AUD100 million of subordinated bonds.
All of these debts are guaranteed by either FGIC UK
Ltd or Syncora Guarantee Inc.
Under a capital restructuring in 2012, the state agreed to acquire all the equity in the project for AUD175 million by 2018 under certain
conditions. The restructure also requires excess cash flow to be retained in the project until a successful refinancing is achieved by
2018.
In return for maintaining the project assets, the project receives an annuity-style revenue stream from Sydney Trains (guaranteed by
the NSW State Government - “state”- NSW Treasury Corp rated Aaa stable) subject to the trains' availability for passenger service.
Performance of the maintenance tasks has been subcontracted to a wholly-owned subsidiary of Downer EDI Rail (guaranteed by its
listed parent Downer EDI).
Detailed Credit Considerations
Availability-based revenue stream underpins cashflow predictability
Reliance Rail's ratings reflect our expectation of predictable cashflow, given its revenue is predominantly derived from availability-style
payments from the highly rated state and are not subject to patronage levels.
The revenue stream is subject to abatement should the project fail to meet contractual reliability standards, with the abatements
not fully passed through to the subcontractor - an unusual feature for Australian PPPs. We believe that the project's exposure is
manageable because its unrecovered abatement has consistently been below budgeted levels, a reflection of its solid operating
performance.
Reliance Rail is able to pass through 80% of total revenue abatements to Downer. Its liability on the remaining 20% of abatement is
subject to a further cap set at about AUD150,000 per month (indexed to inflation), with abatement above the cap fully passed through
to the subcontractor.
We expect the project will continue to incur moderate - but below budget - levels of abatement during the concession term.
Over the past two years, Reliance Rail's average monthly revenue abatements have been below 1% of the Set Availability Unit (SAU)
payment, less than the budgeted 5% level.
Although higher than that experienced by other rated PPPs, we believe these levels of abatement reflect the complex nature of the
underlying assets rather than issues in asset performance or competency of the subcontractor.
This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page on
www.moodys.com for the most updated credit rating action information and rating history.
2 30 August 2017 Reliance Rail Finance Pty Ltd: Update to credit analysis
MOODY'S INVESTORS SERVICE INFRASTRUCTURE AND PROJECT FINANCE
Exhibit 1
Reliance Rail's 12 month rolling average distance between incidents is increasing
-
20,000
40,000
60,000
80,000
100,000
120,000
140,000
Jul-15 Aug-15 Sep-15 Oct-15 Nov-15 Dec-15 Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Feb-17 Mar-17 Apr-17 May-17 Jun-17 Jul-17
Kilometers
Source: Reliance Rail
Solid operating track record
We believe the project's improving operating performance since commencing operations evidences the manageable exposure to latent
manufacturing defects. Such performance also highlights the effectiveness of Reliance Rail and its contractor's maintenance practices.
At the same time, the rating reflects the complexity of Reliance Rail's maintenance tasks, which we regard as high for a PPP.
We believe the project can continue to meet contractual reliability standards, based on subcontractor Downer's experience in
maintaining other train assets.
Although not our base case scenario, a sustained deterioration in operating performance will exert negative pressure on the project's
credit profile even if abatements are passed through to the subcontractor.
We regard Reliance Rail as more vulnerable to a failure of its subcontractor compared with other rated PPPs. This is because, given the
specialized nature of train maintenance work, there is a smaller pool of replacement service providers for Reliance Rail to draw upon, as
well as an increased risk of unforeseen costs associated with the transition.
Uncertainty associated with company's refinancing task in late 2018
The principal source of Reliance Rail's refinancing challenges are its inability to lift its revenue streams to offset the expected increase in
interest costs post refinancing, and uncertainty regarding debt market appetite for the project.
Reliance Rail has maturing debt of around AUD1.15 billion by 2018 - 2019. Because new debt arranged by the project will bear higher
credit margins, the project's credit metrics will weaken, which may in turn constrain the project's ability to raise such new debt.
3 30 August 2017 Reliance Rail Finance Pty Ltd: Update to credit analysis
MOODY'S INVESTORS SERVICE INFRASTRUCTURE AND PROJECT FINANCE
Exhibit 2
Reliance Rail's Debt Maturity Profile
Source: Moody's
Reliance Rail's ability to repay a portion of its maturing debt in September and December 2018 benefits from the proceeds of the
state's AUD175 million equity infusion and retained cash, which will help counteract the impact of higher refinancing margins.
There is a circularity however in that the state's capital injection is conditional upon Reliance Rail's ability to secure funding
commitments to refinance below a stipulated interest rate. As such, Reliance Rail's ability to secure committed funds is dependent on
prevailing debt market conditions.
Our analysis of Reliance Rail's future refinancing risk takes into account the project's structural features, including its forward starting
swaps that fix the project's base interest rate until the end of concession.
Liquidity Analysis
Reliance Rail's liquidity profile benefits from its predictable availability based revenue, its transfer of operating risk to with Downer, and
the absence of debt maturities over the next 12 months.
The project's primary source of liquidity is operating cash flow. This is further supported by performance security from Downer and a
six-month senior debt service reserve available to meet debt service shortfalls. The project liquidity is further benefiting from an equity
distribution lockups with an unrestricted cash balance of AUD150.5 million at 31 July 2017.
Structural Considerations
The B1 rating on the junior bonds reflects their subordinated position in Reliance Rail's capital structure and the likelihood of a lower
recovery, in the event of default.
Rating Methodology and Scorecard Factors
Mapping to Moody's Global PPP Methodology
In assigning Reliance Rail's rating, we have referenced the rating methodology entitled Operational Privately Financed Public
Infrastructure (PFI/PPP/P3) Projects, published in March 2015. The rating under the methodology grid is Ba2, in line with the assigned
rating of Ba2.
The B1 rating of the subordinated debt is two notches from the underlying senior secured rating, reflecting our expectation of lower
recoveries in the event of Project termination.
